This is the time of year for graduations, and gifting assets to your grandchildren can help them get a good start in life. The simplest approach to gifting is of course, to give the grandchild an outright gift. You may give each grandchild up to $19,000 a year without having to report the gifts. If you’re married, both you and your spouse can each make combined gifts totaling. $38,000.
You may have some misgivings about making outright gifts to your grandchildren. There is no guarantee the money will be used in the way you may have wished. Money saved for educational expenses may instead be spent irresponsibly. Fortunately, there are a number of options to protect against misuse of the funds by grandchildren, or even their parents.
You can pay for educational and medical costs directly to the school or medical provider. There’s no limit on these gifts, meaning that you can pay these expenses in addition to making annual gifts.
Another option is a Custodial Account Under the Uniform Gifts to Minors Act. This Act allows you to make gifts to a custodial account that parents and/or grandparents can establish for a minor child. Since the account is in the name of the child, the tax liability is often shifted to the child. Gifts to such accounts are irrevocable, but you retain control of the money and decide how it will be invested.
The above options do have certain drawbacks. Either you have no control of the funds or the money could affect a grandchild’s eligibility for financial aid. An option, which overcomes many of these problems, involves transferring money into a trust established to benefit a grandchild.
Transferring funds into such a trust offers the following benefits:
(1) Although the trust owns the assets, you control them as trustee and can decide what type of investments to make;
(2) Income earned by the trust from amounts you’ve deposited will not be taxed to you; the trust pays the taxes;
(3) Amounts deposited in trust, and the income earned from those funds, will be used for the benefit of your grandchildren;
(4) You can provide the trust terminate at any age you specify.
As a final note, on establishing such trusts, you must be totally comfortable with this gift planning strategy and the amount of money available to you in your estate.
Be Educated! Be Proactive!
Recent Comments