“When grandparents enter the door, discipline flies out the window.” ~Ogden Nash
This quote illustrates the grandparent/grandchild relationship for many families. It is often a joy for grandparents to have the opportunity to “spoil” their grandchildren and give them what their parents can not give them. This can include extra time, unique experiences and it can also include financial gifts.
Financially secure grandparents often enjoy making gifts to their grandchildren. However, there can be many issues related to what might be considered a simple gift. If you are considering gifting a significant amount to your grandchildren, some things to consider include:
Making a Lifetime Gift or a Bequest: Consider whether you want to make the gift during your lifetime or leave the gift after your death. The benefit of giving a gift during your lifetime is that you will have the opportunity to receive your grandchild’s appreciation, and even see them benefit from that gift. However, certain appreciated assets might be better gifted after death as they will receive better tax treatment as an inheritance.
Lifetime Gifts and Lookback Periods: Once a gift is made it cannot be taken back and whether you might need the money to live on during your lifetime is a factor to be considered. If you anticipate needing Medicaid or other government programs to pay for a nursing home or other benefits, any gifts you make in the preceding five years can interfere with your eligibility.
What Form Should a Gift Take?
Some options for gifting to grandchildren include:
1. Paying for educational and medical costs for your grandchildren. There’s no limit on these gifts, meaning that you can pay these expenses in addition to making annual $14,000 (in 2016) gifts. But you have to be sure to pay the school or medical provider directly.
2. You can make gifts to a custodial account that parents can establish for a minor child.
3. You can transfer money into a Trust established to benefit a grandchild.
4. You can reduce your taxable estate while earmarking funds for the higher education of a grandchild through the use of a “529 account.”
5. You can use other gift vehicles like IRAs and savings bonds.
With an outright gift to a grandchild, once such a gift is made, you give up control over how the funds can be used. If your grandchild decides to use the funds in a way that you are not comfortable with you will have no legal right to stop the grandchild. The grandchild’s parents could also in some cases access the money without your approval.
When you establish a Trust, you have the benefit of customizing it to fit your needs. Trusts can provide protection from spendthrifts, divorce and creditors while allowing more flexibility for expenditures such as education or the purchase of a first home.
Tax Consequences
If you have a large estate, giving gifts to grandchildren may be a great way to reduce your future estate tax liability. In 2016, a single person can pass $5.45 million at death free of estate tax, and a couple can pass a combined $10 million without paying federal estate taxes. In addition, a person can give $14,000 in 2016 to any number of individuals without incurring any gift taxes. A person with 10 grandchildren could give $140,000 per year to the grandchildren (and a married couple could give $280,000), thereby removing that property from his or her estate.
To learn more about gift and inheritance planning, please contact The Heritage Law Center at mkarr@maheritagelawcenter.com or 617.299.6976.
