If you want to will away your fortune to your children and grandchildren in the future, you should probably start planning now. You can set up trust funds which will automatically gran finances to your loved ones upon your passing. One option you may want to look into is a trust fund which can be set up under the Uniform Transfers to Minors Act. You can also set up a Qualified Tuition Program which will enable the ones you love to use your money for educational purposes like college or grad school. These are set up under Section 529 of the Internal Revenue Code, and are often called “529 Plans.”
You can also set up an account under the Uniform Gift to Minors Act. According to The Times Herald, you must set up this account before 198 in certain states such as Michigan. Once you deposit money into an account like any of the ones listed above, that money is no longer technically yours. Now, it is a gift to your beneficiary. Depending on which state you are in and how much you give, you may need to file a tax form. Normally, if the financial gift is more than $13,000 you will need to file a Form 709 United States Gift Tax Return. Depending on the nature of the gift you will be compelled or excused from paying the taxes associated with the gift. Every person has a lifetime gift exclusion amount, and if your gift is more than $13,000 to any one person in any one year that would be the first offset of this amount.
Essentially, you don’t have to pay taxes on the gifts that are still within the parameters of the lifetime gift tax exclusion amount. You do have to pay taxes on any grants after your amount is used up. Currently, the federal exclusion amount is about $5.12 million, but it is scheduled to drop to $1 million in 2013. Once you have granted a gift, the law says that it is out of your estate and can’t be retrieved. For example, if you choose to recant a gift because you need the money for expenses, your request is not legal. While your family member may choose to give you back the money, there are times when he or she may want to keep the finances. You cannot legally sue to obtain the money after it has been transferred.
While you can’t withdraw the money for your own purposes, you can often control a trust fund until your passing. You have the right to manage finances for your beneficiaries under the terms of the agreement that you entered into with the financial institution that is holding the funds. You will want to talk to this financial service to confirm that you are acting in legal and appropriate ways in regards to the funds. Normally, you can manage a fund until the beneficiary is 18, or 21 in certain circumstances. Then, the beneficiary is considered an adult and has the right to use the fund and do what he or she wants with it.
Sometimes, with a 529 plan, you can manage the funds in a trust even after your beneficiary has reached adulthood. This is because young adults may use all the money in the fund in an instant on frivolous purchases you didn’t want to facilitate. With a 529 plan, you can guarantee that the money is used for education. If one family member completes college or doesn’t need the money anymore, then you can pick a new beneficiary who wants to head to college. You can also take the funds from a 529 back for your own use if you prefer. You will have to pay a 10 percent penalty tax on the amount of the withdrawal in order to obtain the money, but can use it for personal expenses if necessary.
This is almost the only plan where money can be withdrawn for personal expenses in the future. When you create any trust, you can appoint a successor to manage the financial accounts for you in your absence. Normally, this is a person that you trust and can help to guide your heirs in wise financial decisions. Consider these various options when you are thinking through how to grant your children your fortune. By making wise decisions that avoids unnecessary taxes and helps your children or grandchildren to obtain wise spending habits, you will be able to better control where your money goes!