If you choose this path, you'll want to make sure your child understands the basics of money management to make sure they'll handle this money wisely. Each parent can donate to each child up to the tax-exempt maximum limit without even having to report the amount of the donation on an income tax return. By giving an inheritance before death, parents are allowed some freedom in tax-free giving guidelines through unlimited exclusions. With something like a stock, this is simply the actual present value of the stock in the stock market (typically, the closing value of the shares on the day they are transferred).
Gift tax is a federal tax on transfers of money or property to others without receiving anything (or less than the full value) in return. The IRS defines a gift as “any transfer to a person, either directly or indirectly, in which full consideration is not received in return. If a parent exceeds this amount in a tax year, they must report the surplus on IRS Form 709 - U.S. Gift Tax Return (and Generation Skip Transfer), which is included with the parent's annual tax return.
Every dollar you give as a gift today will only reduce the amount you can transfer tax-free at the time of your death. If the payee does not request a distribution, the money remains in the trust and is managed and distributed according to the terms of the trust. If a parent exceeded this amount, they must report the surplus on IRS Form 709 - U.S. Gift Tax Return (and Generation Skip Transfer), which is included on the parent's annual tax return.
Please note that there may be state taxes or registration fees applicable in this case due to the transfer of a vehicle. It's also important to understand that once your child turns 18 or 21, he or she will be in complete control of the money. For the simplest and smallest transfers (less than the annual exclusion amount), you may not need the services of a professional. The IRS applies gift tax if you transfer money or property, with a value greater than an exempt amount, to another person without receiving at least the same value in return.
And while time spent together may be everyone's most valuable gift, financial donations can help prepare children for a more secure financial future. Gifts must be made directly to an educational institution, not as reimbursements to the student or parent.
