Grandparents can help with direct gifts to grandchildren as long as they know the rules. If you wish to financially help grandchildren or great-grandchildren, there are certain tax issues you need to consider. There is a generation skipping transfer (GST)
Grandparents can help with direct gifts to grandchildren as long as they know the rules. If you wish to financially help grandchildren or great-grandchildren, there are certain tax issues you need to consider.
There is a generation skipping transfer (GST) tax that applies only to wealth transfers to individuals more than one generation beyond you — that is, your children’s children and all the children who follow.
This will not affect most people, because the GST is only triggered if you make direct lifetime gifts more than $2 million (this is the exemption for 2006-2008).
In 2010, the estate tax has disappeared entirely — for one year. Then it is scheduled to come back. This uncertainty makes planning complex.
Gift Taxes
Despite possible tax issues, it is relatively easy for generous grandparents to help out their loved ones.
You can make direct gifts to your grandchildren (paid directly to each grandchild or to a trust with the grandchild as sole beneficiary) of $13,000 per person per year or $26,000 per couple, without triggering tax consequence.
You can also contribute to a state tuition program (known as a “529 Plan”) using your $13,000 gift tax exclusion.
If you want to make one large contribution, you can use up to five years of your Annual Exclusion at once by contributing $65,000 in one year ($130,000 per couple per grandchild).
You can put more restrictions on gifted money by creating a trust. The tax-free $13,000 you can give each year will be held and invested until your grandchild reaches a designated age. Special provisions in the trust are required to receive the benefits of the gift tax exclusion.
As you grandchild grows, any investment returns accumulating in the trust are not considered part of your gift. So, by investing this money wisely, a substantial legacy can be created for your grandchild.
The Irrevocable Life Insurance Trust
An Irrevocable Life Insurance Trust (ILIT) is another way to make your gifts grow.
After you create a trust for you grandchild, it purchases a life insurance policy on your life, using your annual gift to pay the premium.
Because a premium payment may provide many times its value in life insurance coverage, the potential value of your grandchild’s trust may be increased many times over.
The trust you create for your grandchildren must be carefully drafted so that your gifts are handled according to your wishes and the law.
It is important to remember that this trust is irrevocable, meaning it cannot be changed. The guidance of an attorney and tax advisor who specializes in estate planning is essential.
Troy Wada offers securities through AXA Adviso may be reached at 241-7701 or at troy.wada@axa-advisors.com.
