Children's Gifts That Grow Up With Them

As for writing out a check, or the like, a gift that goes beyond the usual mishmash of toys might brighten the eyes of a youngster in the family - by the time he's 20, that is. It could be a share of stock, a bond, a £100 bill - or something more elaborate that requires a bit of planning. The planned gift is worth looking into if you have a sizable amount in mind. Tax savings come into play.

A trust, for instance, gives you a lot of leeway for projects such as school financing. Simplified case: Say that your child will enter school in 10 years. You're in the 45% top tax bracket - the £36,000 to £38,000 taxable-income range. You establish a 10-year trust for the child and put in enough securities to pay about £1,000 a year in dividends or interest. Ten years from now, the £1,000-a-year - at 5% compounded quarterly - comes to about £15,000 in the child's account, and he gets the income almost tax-free. You save £450 a year in taxes since you have split away £1,000 of taxable income, and your saving is a bit more if you figure in a surcharge. For you to put away the same £15,000 over 10 years - after taxes - would take about double the amount of income-producing investments. And the beauty of it is that in 10 years you can return the trust property to your own portfolio. (You'll need legal advice to be sure you meet fine points in state law.)

If you want to avoid the formalities of a trust, consider setting up a simple custodian account. You sidestep appointing and dealing with a trustee and avoid periodic accountings and miscellaneous costs. Assuming you're giving securities, you go to your broker's office and register the gift items in your name - or in someone else's - as "custodian for the benefit" of the youngster. As custodian, you can sell the original securities, reinvest the proceeds, and invest the annual income as you see fit.

You still save taxes by splitting off family income into the child's low tax bracket. There are, though, two possible drawbacks: When the child reaches 21, the property becomes his; and if you are personally named as custodian and die before the child is 21, the property is part of your estate for tax purposes. But note: You can name a family member as custodian.

There is also, of course, the simple savings account for a child. If you bank £1 today at 6 V2% say, it will build to about £2 in 10 years. A bank will work out a savings schedule for anybody who wants to plan something sizable, such as school financing.

Another idea is to start a child on the road to his own life insurance program, beginning at a low premium. You ease things for him in later years. Straight life costs about £8 a year per £1,000 at age 5, around £9 at age 10, and £10 at age 15 - assuming at least £10,000 in coverage. This jumps to £16 at age 30 when your child, maybe as a young parent, might need to buy.

You can get some added values by attaching options to a child's life policy. Take a simple example: Say that you buy a £10,000 policy for a boy aged 10 for £90 a year. Adding an option charge of £9 a year will give the boy the right to buy more coverage, in £10,000 jumps, at option dates in the future, regardless of his state of health. Under a typical plan, his possible coverage is £70,000.

Birthday, Christmas, or graduation gifts for the children in your family can mark the start of long-range gift planning that's tied in with saving estate taxes. If you give £60,000 to your children (the amount of a married couple's lifetime gift tax exemption), and your taxable estate turns out to be more than £100,000, your family will save at least £15,000 in taxes. These savings mount fast as bigger money becomes involved. A £100,000 taxable estate is hit with about £20,000 in estate taxes, but this jumps to nearly £62,000 if the estate reaches £250,000. It's £133,000 for a £500,000 estate.

Besides your husband-wife £60,000 lifetime exemption from gift tax, you and your wife can give £6,000 a year to each member of your family tax-free. But, this annual exclusion can't be carried forward. At year's end it is lost for good. Timing: At this writing, the rumor (even expectation) among many tax solicitors is that the estate and gift tax laws will be revised by 2006. The direction of reform is almost totally up in the air - so double-check with your family solicitor if and when you get down to any serious lifetime gift program.


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How To Find Your Way Through Toyland

A money gift for a child is easy - you sign your name. But walking into a bulging toy store before a birthday or Christmas can be an exercise in confusion especially if you're just a friend of the family. Here are some ideas on picking presents for a child, starting with a sound rule of thumb: The most successful, popular toy requires participation from the child. Children delight in working things out for themselves - using their limitless imaginations. So say child psychologists.

If a toy has only a single limited use, it will provide no challenge to the child. He'll quickly lose interest, for example, in a missile-launching rocket that takes just pushing a button, despite the excitement... see: How To Find Your Way Through Toyland