Many grandparents who are financially stable love the idea of making gifts to their grandchildren. However, they are usually not aware of the myriad of issues that surround what they may consider to be a simple gift. If you are considering making a significant gift to a grandchild, you should consult with a qualified attorney to guide you through the myriad of legal and tax issues that are involved in making such gifts.
Making a Lifetime Gift or a Bequest: Before making a gift, you should consider whether you want to make the gift during your lifetime or leave the gift to your grandchild in your will or living trust. If you make the gift as a bequest in your will or living trust you will not experience the joy of seeing your grandchild’s appreciation and use of the gift. However, if you make the gift now, while you are still around to share in their joy, you are depleting your assets and there’s always the possibility that you will need the money to live on during your lifetime, and in reality, once a gift is made it cannot be taken back. Also, if you anticipate needing Medicaid or other government programs to pay for a nursing home or other benefits at some point in your life, if you have not done the proper planning ahead of time, any gifts you make in the prior five years can be considered as part of your assets when determining your eligibility.
What Form Should the Gift Take: You may consider making a gift outright to a grandchild. However, once such a gift is made, you give up control over how the funds can be used. If your grandchild decides to purchase a brand-new sports car or take an extravagant vacation, 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.
You could consider making a gift under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), depending on which state you live in. The accounts are easy to open, but once the grandchild reaches the age of majority, he or she will have unfettered access to the funds. You could also consider depositing money into a 529 plan, which is specifically designed for education purposes. Finally, you could consider establishing a trust with an estate planning attorney, which can be more expensive to set up, but can be customized to fit your needs. Such a trust can provide for spendthrift, divorce and creditor protection while allowing for more flexibility for expenditures such as education or purchase of a first home.
Tax Consequences: If you have a large estate, giving gifts to grandchildren and other loved ones may be a great way to get money out of your estate in order to reduce your future estate tax liability. In 2012, a single person can pass $5 million at death free of estate tax, and a couple can pass a combined $10 million without paying estate taxes, if they should both pass away in 2012. In addition, a person can give up to $13,000 in 2012 to any number of individuals without incurring any gift taxes or need to file a gift tax return. A grandparent with 10 grandchildren could give $130,000 per year total to all grandchildren (and a married couple could give $260,000), thereby removing that property from his or her estate. There are some unique gifting options available in 2012 that may not be around in years to come. If this may be of interest to you, contact your attorney or this firm to discuss your options.