Grandparents are regularly generous with grandchildren, sometimes giving significant amounts of money. With the holidays approaching, gifting increases.
Often grandparents want to share their resources to leave a legacy. In some cases, their children or grandchildren are dealing with financial hardship. Grandparents might also believe that their kin shouldn’t have to wait for their inheritance.
Grandparents commonly provided assistance paying for summer camp, college tuition, weddings or down payments for homes.
They should keep the following factors in mind when giving to grandchildren, however, and they should be sure to contact their attorney or accountant who can advise them on the tax implications of their kindness.
If you’re not giving a gift, state it clearly. If you expect anything, such as repayment, in return, or if the gift is an advance on the recipient’s inheritance, put it in writing. Indicate it in a note along with the check, or in a promissory note if it’s intended to be a loan.
Think about all grandchildren and how they are treated. One grandchild might have greater financial need than another, or you might be closer with one than another. Before giving unequal gifts to grandchildren, think about the implications. In some situations, grandparents choose to do what they want for each grandchild while they are alive, and then treat children equally in their estate plan.
Evaluate whether a gift is taxable. Under current tax law, a Connecticut taxpayer need not pay any gift tax for the first $3.6 million that an individual gives away in his or her lifetime. However, any gift of more than $15,000 per year to a single recipient (in 2019) must be reported on a gift tax return. Two grandparents together can give up to $30,000 per recipient per year. There is no limit, and no reporting is required, for payments made directly to educational institutions for tuition or to medical institutions for health care.
Contribute to a 529 plan for each grandchild. Open a 529 plan for each grandchild, which allows for tax-deferred growth, assuming the accounts are used entirely to pay for higher education.
Consider trusts in particular cases. Make sure you know your grandchildren well. Some cannot be trusted to use money wisely, or for its intended purpose. One option is to give the money in a trust that’s associated with an incentive. For example, the benefits of the trust could go to the grandchild after he or she graduates from college or stay in a long-term trust as an asset protection vehicle. Please contact Ericson, Scalise & Mangan, PC with any questions.