The bond between grandparents and grandchildren is unique. Typically free of daily responsibility for them, grandparents can focus on fun ”“ and making financial gifts can be especially satisfying.
In many cases, though, the recession has altered family dynamics. Parents may have lost their jobs. Retirement and college funds may have been raided to pay monthly bills. The generations may even have moved in together. So gifting to grandchildren can have an added dimension and it”™s more important than ever to ensure that kindhearted gestures have the intended results. At the same time, a little forethought can lower your taxes or help qualify you for Medicaid coverage of long-term care.
Think through your goals. Do you want to help cover the cost of education or a first car? Do you envision annual gifts or a lump sum? Be careful not to over-extend yourself and budget for the economic downturns that can play havoc with retirement savings. Don”™t forget to factor in the possibility of long-term care expense, as well.
Cold cash
Writing a check may be easy but, tax considerations come into play if you make gifts in excess of $14,000 (as of 2013) to an individual in a single year. That maximum doubles for gifts from married couples. In addition to the annual $14,000 exclusion, there”™s a $5.25 million (indexed for inflation) lifetime limit to tax-free gifting. Your grandchildren will incur no tax liability in either case ”“ unless the money is invested and earns income.
You may, however, have misgivings about how the funds might be used. A teenager”™s idea of money well spent may differ sharply from yours. In that case, you could consider covering education or medical bills. If payments are made directly to the service provider, there”™s no gift limit.
If the child has disabilities, there”™s an additional consideration, since your generosity could disqualify them for important means-tested government benefits. In that case, you”™ll want to explore creating a special needs trust, a vehicle to hold funds benefiting someone with disabilities without affecting their eligibility for public programs.
Costly colleges
The rising cost of higher education makes it a favorite target for doting grandparents. Investment income generated by a 529 account is tax-free so long as the funds are used to defray college expenses. There are often state income tax breaks for contributions, as well. Some 529 accounts will enable you to pay today”™s rates for tuition credits to be used at public colleges in the future. Gifting maximums apply, and while such accounts can affect a child”™s eligibility for means-tested public benefits, they generally won”™t interfere with their eligibility for college financial assistance.
If your goals are broader than funding higher education, consider establishing a custodial account. If your grandchild is under 21 (18 in some states), such an account, regulated under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA), will enable you to retain influence over how the assets are used until the beneficiary reaches adulthood. UTMA accounts are offered by banks and brokerage firms and can be funded with a broad range of financial assets in addition to cash. One downside is that they are often considered when calculating the need for college financial assistance.
Strings attached
In contrast, naming yourself trustee of a gift trust places you squarely in control for as long as you wish. You determine how assets are invested, when they become available to the beneficiary and even, if you wish, how distributions can be spent. The trust can also be designed so that you assume tax liability for any income that it generates. This may reduce the overall taxes paid by you and the trust. Since there are many variations, it”™s important to consult an experienced attorney who can structure the trust to comply with your specific goals.
Of course, you can always leave money to the grandkids in your will, but there are definitely benefits to bestowing your financial gifts now. Beyond witnessing the smiles on their faces, you”™ll be reducing your heirs”™ exposure to estate taxes and spending down your assets in case you need Medicaid assistance for long-term care. All it takes is a little planning to ensure that your good intentions will have the desired effect.
Bernard A. Krooks is managing partner of the law firm Littman Krooks L.L.P. (littmankrooks.com), with offices in White Plains, Fishkill and Manhattan. He is a certified elder law attorney and past president of both the National Academy of Elder Law Attorneys and the New York State Bar Association Elder Law Section.
