5 Ways to Give your Godchild (or loved one) a financial boost

What can a godparent, aunt/uncle, close family friend do to give a special child in their life a leg up?

Idea #1: Help them invest for various financial goals (non-education, non-retirement)
Consider setting money aside for them in a brokerage account. Lots of flexibility. You could consider gifting stocks that have fallen in value to minimize capital gains. Remember, gifting appreciated stock is generally not a good idea. They inherit your original cost basis and holding period. They’re likely in a lower tax bracket than you but this could nudge them into the next bracket. Also, beware of kiddie tax on unearned income for children up to 24 years old.

Idea #2: Help them earn money and comprehend chores (age ~6 and beyond)
Provide an opportunity for them to earn some cash. Help them connect the dots of what it means to earn money – money comes from work, it isn’t just assigned to you because you are here. You could offer for them to perform personal chores or tasks or have them work through a connection of yours.

Idea #3: Help them save for retirement (first job)
A Roth IRA has no minimum age requirements to put money in. An adult could open a custodial Roth, save money in the child’s name and retain control of the account until age of majority. Remember, both those named must have earned income and file income tax returns. You can save up to $6,000/year in 2020 (but no more than their earned income). The compounding impact of the Roth IRA really can’t be overstated.

Idea #4: Teach them what they didn’t learn in school (age 18 and beyond)
Get them engaged, help them understand what their own cash flow, paystub, and taxes look like. You could schedule dates with them to go over their finances, consider it an “empower hour”. Have them read books and listen to podcasts to begin absorption. Or pay for a meeting with a financial planner. We all know young people have an easier time accepting advice from people they aren’t related to. No judgment, no scolding, and confidentiality. Some planners offer hourly rates for unbiased advice (like our team here at MainStreet). It can be a gift that keeps giving for decades.

Idea #5: Help them save for education (private K-12 or college)
Many people don’t realize there are actually two types of 529 plans. Prepaid tuition plans and college savings plans. The first one locks in the rate of tuition at today’s price to pay for that state’s eligible colleges or universities. The student must attend certain schools to receive the funds. Alternatively, the 529 plan you’re likely familiar with is a savings plan that provides a tax-advantaged way to put aside money for college and/or K through 12 expenses. The student can use funds for the school (or trade) of their choice. You can save a significant sum of money to the accounts, and there are no income or age limitations, and there are a couple of great tax benefits.

Keep in mind a Coverdell Education Savings Account works best when the contributor is a child’s parent because it’s too easy to trigger penalties by inadvertently making excess contributions. There’s a $2,000 annual limit, and you’d get in trouble if one of the contributors has income above the phase-out range. The beneficiary must be under 18.

Custodial Accounts (UTMA + UGMA) allow gifts to a minor that can’t be revoked. The beneficiary takes control of assets at age of majority. Until then, the custodian can withdraw the money for anything to benefit the child. If you don’t want that responsibility you can be a donor and appoint parents as custodians. The minor owns the asset so it impacts FAFSA and financial aid eligibility for the student. Beware of annual gift tax limitations and kiddie tax rules. This is an irrevocable gift to the minor that you cannot take back.

And lastly, you could provide outright cash, up to annual gift tax exclusion – $15,000 in 2020. The federal government allows people to give a certain amount of money or assets to other individuals without incurring taxes up to a certain limit. If you don’t want to deal with the hassle of establishing accounts, you can simply give the godchild an amount up to the limit each year.

FYI If you want to pay tuition directly to the college it does not incur a gift tax penalty, but state gift taxes may still apply.