What It’s Worth

What It’s Worth

Smart Gifting Can Have Long-term Benefits for Your Recipients

Author: Michelle Parish
Published Date: 2/27/2018

Your kids and grandkids mean the world to you—we get that! If you’re like many of us, you probably spend hours trying to select the perfect gifts for birthdays, holidays, and graduations. What if instead of spending that money on expensive electronic devices or gift cards you put it toward financial investments designed to help secure your loved one’s future? These types of presents may not be the trendiest items on a child’s or grandchild’s wish list, but they can be inherently more valuable and could benefit them for years to come.

Savings bonds often come to mind as a classic example of a thoughtful financial gift, and they are certainly a safe, long-term investment. However, at a current interest rate of 0.1 percent for Series EE bonds—the most common type of savings bond—there are other gift options that work harder dollar-for-dollar and come with a broader range of features and benefits.

Chip Glispin, senior vice president and wealth strategist with PlainsCapital Bank, points out that whether you have $100 or $10,000 to give, it’s important to determine the manner in which you would like to see the gift applied.

“It helps to know if you want your financial gift to go toward something like private school tuition, medical or dental expenses, college, a trip abroad, or even a down payment on a house, as this can dictate if the investment vehicle should account for long-term or shorter-term liquidity needs and accessibility,” said Glispin. “Options worth considering include designated college funds, UGMA and UTMA accounts, trust accounts, and Roth IRAs.”

Beginning this year, the annual gift tax exclusion increases from $14,000 to $15,000 per beneficiary, tax-free, without impacting an individual’s lifetime gift and estate tax exemptions. If you and your spouse both want to make a joint gift to the same recipient within the same calendar year, the gift limit doubles to $30,000 per beneficiary per year without the need to file a gift tax return.

Annual gifting is an easy way to distribute assets to loved ones and offers taxable benefits for those looking to reduce their estate tax exposure. With the 2018 tax season underway, people may be interested in taking advantage of the increased gift tax exemption as an opportunity to further invest in a loved one’s future.

It’s always a good idea to consult with your accountant or banking financial advisor, but here’s a quick list of some available options:

College Funds—529 Plans and Coverdell Education Savings Accounts

If helping to pay for college is your goal, opening or contributing to a tax-advantaged college savings plan like a 529 or Coverdell Education Savings Account (ESA) can help pay for a child or grandchild’s college costs. Money invested in both plans grows over time thanks to the power of compound interest, and all of the earnings and capital gains grow tax-free. Earnings and withdrawals from a 529 Plan and ESA account are not taxable as long as distributions are used to pay for qualified school expenses like tuition, room and board, student activity fees, books, supplies, and school-required equipment including computers. With the recent changes to the tax code, 529 Plans are no longer restricted solely to pay for college. Withdrawals can now be used to pay for private tuition for a child’s primary and secondary schooling, similar to ESAs. Both types of plans can easily be set up at most banks. Regarding ESAs, parents, grandparents, relatives, friends, and even the child for whom the account is established can contribute to the account within the income limitations imposed by the IRS.  Additionally, ESA contributions are subject to a $2,000 limit per child per year.


Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are similar to a bank savings account with the main difference being that UGMAs and UTMAs are held in a custodian’s name, usually the parent or grandparent, who hold and protect the assets for the minor until they reach the age of majority in their state (18 to 21, depending on the sate). Because the assets are considered the property of the minor, a certain amount of the investment income may go untaxed due to the child’s tax rate. 


While a trust account offers the most flexibility in terms of how it can be structured, it really only makes financial sense if you’re moving serious money into it, as there are costs involved in setting up a trust—between $1,500 and $5,000. That said, trust accounts allow family members to contribute just about any asset they want—cash, CDs, stocks, bonds, mutual funds, exchange-traded funds (ETF), and real property assets.  Furthermore, the originator of the trust account  can stipulate how those assets may be used, be it for college or other things further along in the beneficiary’s life. Trusts can be established at any time, no matter the beneficiary’s age, and the person setting up the trust has the authority to dictate how and when disbursements are made. Trusts may also offer some tax advantages, so it’s a good idea to consult with a legal, tax or financial advisor prior to opening one. 

Roth IRA

If your child or grandchild is old enough to have earned income from a job—meaning they received a W2 from an employer—they are eligible to open a Roth IRA account to which anyone can help contribute. Contributions to a Roth IRA are not deductible. However, all of the earnings generated by the account and qualified distributions (withdrawals) made from it are tax-free. The account holder may withdraw money without paying any taxes after they reach 59.5 years of age, as long as the account has been open for at least five years. Other qualified distributions from a Roth IRA include disability and first-time home purchases. The benefit to opening a Roth IRA while a someone is young is time—allowing the fund the opportunity to grow, compound, and earn more money over the course of the person’s life. There are some stipulations regarding withdrawals, but the ability to contribute money in an account and never be taxed again is a great investment opportunity. While you cannot directly fund a Roth IRA for a child or grandchild, you can help them set one up at a bank and fund the account through cash gifts or matching contributions.


Whatever your resources, you have the ability to impact your loved one’s life in a far-reaching manner and potentially help them achieve something that otherwise might not be possible. To learn more about these and other wealth management services, visit the PlainsCapital Bank website or email wealthmanagement@plainscapital.com to be connected with a wealth management advisor.




Tags: Personal Banking,Personal Savings