When estate planning, gifting assets to your grandchildren can do more than help your descendants get a good start in life; it can also reduce the size of your estate and the tax that will be due upon your death.
There are a number of ways to help your grandchildren with financial gifts. You can give cash, make educational contributions, assist with medical expenses, or contribute through savings bonds and IRAs.
If you choose to give your grandchildren cash gifts, you may give each grandchild up to $14,000 a year (in 2015) without having to report the gifts. If you’re married, both you and your spouse can make such gifts. A married couple with two grandchildren may give away up to $56,000 a year with no gift tax implications. This is an easy approach to gifting and the gifts will not count as taxable income to your grandchildren (unless the gifts are invested, then the earnings of the gifts will be taxed).
It is important to keep in mind that any gift can interfere with Medicaid eligibility. Under federal Medicaid law, if you transfer certain assets within five years before applying for Medicaid, you will be ineligible for a period of time (called a transfer penalty), depending the amount of money you transfer. Even small transfers can affect eligibility.
Since there is no way to dictate the way a grandchild will spend the funds you gift to them, you may want to seek an alternative option.
You can pay for educational and medical expenses for your grandchildren. If you pay the school or medical care provider directly, there is no limit on these gifts. You can pay these expenses in addition to making annual gifts in cash (up to$14,000 in 2015). If your grandchildren have not yet reached college age, there is still good news. The IRS does not say the gift has to be given to a college. The IRS website says:
“The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual. A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and its regulations.”
Of course, you can still reduce your taxable estate while earmarking funds for the higher education of a grandchild through the use of a “529 account.”
If the options listed above don’t appeal to you, you can always make gifts to a custodial account that parents can establish for a minor child or transfer money into a trust established to benefit a grandchild.
There are a number of options available to aid you and your family during the estate planning process. Your Family Law Attorney is a great resource to help you maximize your assets.