HELPING GRANDCHILDREN WHILE CUTTING ESTATE TAXES

Most grandparents want to help their grandchildren and many grandparents also need to plan their own estates. Fortunately, there are ways to do both.

Annual Gifts

If you are a grandparent, family gift-giving can be one of the best ways to start. You may give up to $10,000 per year to each grandchild without triggering gift tax, and your spouse may do the same. Although this might seem like a relatively small tax break, it can quickly add up. For example, if you have four grandchildren, you and your spouse can trim your combined estates by $80,000 per year, free of gift tax.

Tuition and Medical Costs

In addition to your $10,000 annual gifts, you may pay an unlimited amount for each grandchild’s tuition and medical expenses without triggering gift tax. Expenses such as dorm fees, books and travel do not qualify, and you must make your payment directly to the institution providing the services. But if you observe the technicalities, this can be a sizable tax break.

Other Gifts

When making family gifts, remember that you are not restricted to cash. For example, you may be able to create significant estate tax savings by giving your life insurance policies to a trust for the benefit of your grandchildren.

If you own a business, you can select from a number of attractive gift-giving strategies, which range from the simple to the complex. At one end of the spectrum, you can simply give stock in the family business to your grandchildren. At the other end of the spectrum, you can choose from sophisticated estate planning strategies like the family limited partnership.

If you wish to provide for grandchildren in your estate, consider using your IRA or other qualified retirement plans to do so. Your heirs may realize valuable income tax deferral if you name a grandchild as your plan beneficiary.

Problems to Consider

You should be aware of several potential traps when planning an estate with your grandchildren in mind.

Probably the biggest pitfall is the generation skipping transfer tax, or GSTT. As the name implies, the GSTT is designed to tax gifts that “skip” a generation such as gifts made directly to grandchildren.

Fortunately, there are numerous exclusions and exceptions to the GSTT, and many good planning opportunities still exist.

Before you embark on a gift-giving program, you should also carefully consider the financial and income tax consequences of your proposed gift. For example, can you afford to permanently part with the assets that you wish to give away?

If you make a gift to a grandchild under age 14, will you create a “kiddie tax” problem for the recipient, or make an existing problem worse? Are you giving away assets with the proper tax basis? As a general rule, a grandparent’s gift of low-basis assets is less advantageous than a gift of higher-basis assets.

Get Help

If you are a grandparent, it all comes down to some simple advice: By all means, plan for your grandchild. But give us a call first.