There are multiple benefits when you make gifts to your grandchildren: helping to assure their future by sharing your resources with them is a nice thing to do, of course, but gifting can also reduce the size of your estate and the tax that will be due upon your death.
This year, each grandparent can give each grandchild up to $13,000 without having to report the gift to the IRS. Or you can give more; paying a grandchild’s health care or tuition expenses directly to the provider of those services does not count against the $13,000 per year limit (these gifting rules are not limited to grandchildren, but for purposes of this article, we will be talking exclusively about gifts to grandchildren).
In addition to the $13,000 per year limit, every person has a lifetime limit of $1 million before gift taxes are due, but there are gift tax consequences to exceeding the $13,000 per year per person annual limit. If you are interested in making more substantial gifts than that, you should consult us before making such a gift.
There are also options as to the form of the gift. You can make an outright gift or you can put the money in a custodial account. However, putting the money into a specially-designed trust has some major advantages.
We can help you draft a trust that stipulates when the income and principal will be available to the grandchild – and, if you want, even what uses the funds can be put to. Transferring funds into such a trust offers the following benefits:
You can reduce the size of your taxable estate, and therefore reduce the size of your estate tax burden at your death;
You may choose whether the income earned by the trust is taxed to the trust, to the beneficiary, or to you, depending upon which strategy suits your objectives;
Your grandchildren will be the sole beneficiaries of all amounts put into the trust, as well as the income earned from those amounts; and
You can provide that the trust terminates at any age or other event that you specify or, if you wish, you can provide that it continues for the life of the grandchild, making it an effective inheritance protection trust, immune from the claims of the grandchild’s potential divorcing spouse or third party creditor.
Trusts can be complex, which means you and your Huck Bouma attorney should talk about the advantages and disadvantages of making gifts to your grandchildren before you take any action. There are as many planning options available as there are purposes for which to establish gift trusts.
Using trusts is a great way to make gifts to someone who is not yet capable of managing money, or to protect money from the reach of others. And, of course, you should only make gifts if you feel certain that the amount of funds remaining in your name and the income they will produce will be adequate for your needs.
In many situations, gifting assets to your grandchildren can be a good idea. To discuss this strategy, call Huck Bouma at (630)682.0700 or e-mail us (firstname.lastname@example.org) today.