Are you a PANK (professional aunt no kids) or PUNK (professional uncle no kids) who relishes the role of doting aunt or uncle? If so, then July 26th, which is Aunt and Uncle Day in the U.S., is all about celebrating you! Regardless of your “professional” status, if you are an aunt or an uncle who wants to assist your nieces and nephews financially, we offer tips on different ways to give, including:
Direct annual gifting: Each year, the annual gift exclusion allows you to give a specified amount of assets to an unlimited number of recipients without incurring gift tax (or using any part of your lifetime gift tax exclusion). The 2022 amount is $16,000 per recipient or $32,000 per married couple per recipient. This can help your nieces and nephews begin to build for their future while reducing your taxable estate.
UTMA/UGMA Accounts: If you would like to maintain more control over how your gift is used, a Uniform Transfer to Minors Act or Uniform Gifts to Minors Act account may be an option versus a direct gift. In an UTMA or UGMA account, you or a designated adult are the legal custodian on the account. Funds can be used for any purpose, as long as they are used for the benefit of the minor. Once the minor reaches the age of majority, which varies by state, he or she becomes the owner of the account and is entitled to immediate access to the funds.
529 Plans: If you want your gifts to be earmarked for your niece’s or nephew’s education, you may want to consider a 529 Plan. Each state has a different plan with varying features, and a portion of your contribution may be deductible for state income taxes purposes. In addition, you may front-load your gift, giving up to five times the annual gift tax exclusion in one year without incurring federal gift tax (provided you do not make any other gifts to that recipient within the five-year period). Funds in a 529 grow free from federal income tax, and you won’t be taxed on any capital gains in the account provided the money is used for qualified educational expenses.
Beneficiary designations: You may have a 401(k) account, an IRA, life insurance policies, or other financial accounts which allow (and sometimes require) you to name beneficiaries. Naming your nieces and/or nephews as beneficiaries on these accounts helps ensure the assets go to whom you wish, and your heirs avoid probate for those assets.
Bequests: An up-to-date Will is an important part of estate planning. A Will gives you the opportunity to legally specify your wishes for the disposition of your assets upon your death, based on your individual situation and the needs of your loved ones. For example, if you want to help provide for a niece or nephew with a disability, a special needs trust can be created under your Will which may be a better vehicle than a direct bequest.
Trusts: Depending on the complexity of your finances and the size of your estate, a trust created during your lifetime may be the most suitable way to provide for your loved ones to ensure your assets are protected. A trust can be customized to a particular situation and can hold less traditional and less liquid assets, can help avoid probate, and may have estate and gift tax benefits.
Klingenstein Fields Advisors (KF Advisors) can work with your legal, tax, and other experts to help you review your finances and determine the best way to give to loved ones based on their needs and your circumstances and goals.
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