Sharing your welath now ...
examining the types of monetary gifts for grandchildren
By Michael Matty, CFA, CFP,
Chief Investment Officer,
St. Germain Investment Management
Special to PRIME
It is sometimes said that it is a grandparent's prerogative to spoil the children and then send them home.
In many cases, however, the child's home is increasingly WITH the grandparents ... according to the census data, over four and a half million children (a little over 6 percent of all U.S. children) live in a household headed by a grandparent.
Grandkids and tax issues
Financially speaking, these specific grandparents can claim some specific income tax provisions (e.g. child tax credits).
More broadly speaking, however, almost all grandparents get involved in making gifts to grandchildren, helping out with college expenses, or otherwise involving them in their estate/income tax planning. With that in mind, what are some of the more common options do you have to accomplish such a transfer?
Types of monetary gifts
Outright Gifts: Without running afoul of gift tax laws, you can currently directly gift $11,000 annually to a grandchild. If you are married, your spouse can do the same, for a total of $22,000. This removes these assets from your estate, and benefits the child, but also puts the assets directly under the sole control of the grandchild (or guardian if they are a minor).
In many cases, grandparents do not wish to put such large amounts directly into the hands of a child or young adult who may not use it wisely. After all, a new Mustang convertible may sound like a FAR better 'investment' to an 18 year old than a college education. In addition, if the child is under age 14, these assets will be subject to the "kiddie tax", as well as potentially counting against the child for financial aid when they apply for college. But if these issues are not a concern, this is a quick and simple way to move assets.
UGMA/UTMA Accounts (Uniform Gift to Minors Act/ Uniform Gifts to Minors Act): A gift made to the child, but they do not get access to it until they reach a specified age (21 in most states)-in the meantime, a parent or the grandparent can oversee the account.
While this keeps the money under the control of a custodian until a later date, the assets are still accessible upon reaching age 21, and can be immediately withdrawn and spent. In addition, any contribution to such an account is irrevocable. You cannot decide that you want this money because your 20-year-old grandchild is still extremely immature and will spend the money in a manner that you deem inappropriate.
In the meantime, the assets will still be subject to kiddie tax laws, as well as hurting financial aid awards. But they UGMA/UTMA setup does typically keep the money out of the child's reach until a (somewhat) older age.
Irrevocable Trust: If properly structured (as a "Crummy Trust"), non-taxable gift transfers can be made to a Trust with the grandchild (or multiple grandchildren) as a beneficiary. The Trust document itself will specify who and at what ages the beneficiaries actually receive the money. Such a Trust will avoid the kiddie tax, and possibly not count for financial aid purposes. On the downside, once a gift is made to the Trust, you cannot take it back. In addition, the Trust will require an attorney to set up, and must file its own tax return on an annual basis. However, it does allow you a high degree of control over when and how the recipients get control of the money.
2503c Minor's Trust: Allows you (or another Trustee) to control the assets until age 21. At that time, the assets can either go to the beneficiary, or possibly into a Crummy Trust (and remain under control of a Trustee). The Minor's Trust will avoid kiddie tax issues, but still hurt financial aid eligibility.
529 Plans: Money can be put into an easy-to-set-up 529 Plan, which must spend the money on qualified education expenses (or pay penalties and taxes). The donor continues to control the money until it is withdrawn for education. If the child decides not to go to college, the donor can reclaim the assets (subject to some taxes and penalties), or change the beneficiary to another grandchild.
There are no kiddie tax issues. In addition, assets in 529 plans are not counted as the student's assets for some financial aid purposes. If your 'gift' to your grandchild is intended to help fund an education, such a plan is likely your best choice. But be selective about which 529 plan you choose, however. You do not have to use your own state's plan.
While the above choices (as well as some others available) may sound confusing, they need not be. As always, sit down with a financial advisor or your accountant to discuss the best alternatives for you.
Column provided to PRIME by: St. Germain Investment Management; 1500 Main Street; Springfield, MA 01115
Phone is 413-733-5111 or 800-443-7624
www.djstgermain.com.