Six Ways to Pass Money to your Kids Tax Free (or tax reduced)



If you are a parent (or grandparent), you most likely want your kids to have a better life than you do. Perhaps, in part, that means more access to financial resources. You can work hard, save your money, build your business and pass it along to your kids at your death, but who knows when that will be. Who knows what your kids will do with it then. Who knows how much Uncle Sam will take from them in estate taxes.

Here are 6 things you can do now to provide your children or grandchildren access to more financial resources, tax free (or at least tax reduced).

Caveat: I am not a lawyer or an accountant or a tax expert. Consult a professional about your particular situation before implementing any of these strategies.

Make them a limited partner in your business.

As your business grows, their stake in it grows organically – with additional shares or with added value per share. You will not be leaving the business to them at death as they will already own shares in it.

You will remain the general partner, making all of the decisions. According to Estate

“…you have a fiduciary obligation to the other owners, you control the family partnership as the general partner; you determine how the assets are managed, when income is distributed and how the partnership is run. Limited partners (typically your children) are passive — they have no say in how the partnership is managed. Profits and losses are allocated among the partners, but no income is distributed unless you, as the general partner, decide to do so. Also, the agreement can be written so that shares cannot be sold or transferred without your approval.”

Benefits include being able to involve your children in your business, helping them to understand what it means to you, what the business is and how it is run.

Sam Walton set up Walmart as a family partnership and avoided a lot of estate and gift taxes by doing so. Read more about it at The Walton Wealth.

Hire your kid to work in your company.

It’s good for you, good for them and good for your business.

According to a Bank Rate article if you hire your children for your limited liability corporation (llc), you are relieved from withholding income taxes and paying payroll taxes, including Social Security, until the child turns 18. Also, you need not pay federal unemployment taxes until the child turns 21. says

“to sidestep the problem” (of having to have an llc), “I recommend you pay children out of a family management company paid a management fee from the corporation, or simply pay them out of a sole-proprietorship or LLC with independent income and operations.”

Of course, they still have to pay taxes on their income and you need to pay them a fair wage for the job at hand.

Your child gets experience working in the business and the business gets an employee trained by the best (YOU!).

If you add a gifting option that matches the kid’s salary, and require them to put their actual salary into a Roth IRA, they get a head start on their retirement.

Give an annual gift.

Set up a trust for each child and gift the trust each year – up to the annual gift tax exclusion amount (currently $13,000 per person to any number of people).

In the US, gift taxes become due from the person giving the gift, if they exceed the annual gift exclusion amount.

A gift must be totally under the control of the receiving person. If you give an annual gift and put it into an UGMA or UTMA account for your child, you cannot be the custodian of that account. You will want the money invested so that it grows for your child. To do that, you might want to set up the trust account (non-revokable so the gift is clearly not available to you) with you as the trustee of the trust for your child.

Give gifts on which no taxes are due.

Pay for your child’s or grandchild’s college tuition, or for medical care for them, instead of leaving them the money in your will.

According to the IRS, these types of gifts are not counted in the gift tax exclusion amount.

Have them own a life insurance policy on your life.

You can either have them own the policy or set up a trust to own the policy, then gift the trust each year for the amount of the premium and have the trust pay the life insurance company. Since the policy is not in your name, it is not included in your estate when you die, and no estate taxes accrue on the amount of the policy. Your beneficiary (your child) gets the (not taxable to them) death benefit.

Use Your IRA to give a lifetime of tax free income.

There are currently ways for you to set the beneficiary designations on your Roth or Traditional IRA so that you can stretch out the non-taxable status of the principal and earnings over the lifetime of your child or grandchild.

This greatly enhances the final amount derived by the final beneficiaries because the money continues to accumulate tax free for extended periods of time.

After you die and your child inherits the IRA, he or she would have to take a distribution from either a Roth or a Traditional IRA each year, the difference being that the money from the Roth would not be taxed, but the money from the Traditional IRA would be. Deborah Jacobs explains how in Forbes article How to Stretch Out an IRA.

Warning, tax laws may change and you must train and trust your beneficiaries not to prematurely withdraw the funds!

Are you planning to give your kid a leg up?  How will you pass assets to the next generation?

This post has been written by Marie from Be sure to visit her site if you’ve enjoyed this post!

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