3 Savvy Ways to Pass Money On to Grandchildren
By: Source: AARP Bulletin Today Date Posted: July 2002
Section 529 college savings plans aren't the only tax-advantageous way to pass money on to your grandchildren. Consider these three other options:
1. Use the Gift Tax Exclusion
Beginning this year, you can give, tax free, up to $11,000 annually to any individual(s)—as many folks as you want. The limit was increased from $10,000 last year. You may decide to park that gift in a Sect. 529 savings plan (where you get the added bonus of tax-free distributions down the line) or in a custodial account set up in your grandchild's name—or you may give it to them outright.
2. Pay Your Grandkids' Tuition Directly
Paying education-related costs directly gets you an unlimited gift tax exclusion for the year—apart from the annual gift tax exclusion. So if you pay for your grandchild to attend an expensive private college with tuition running $20,000 or more, that money escapes the reach of the tax man. (Note: You also can pay someone's medical expenses and get the same tax benefit. However, you must pay the institution or provider directly—not the student or the sick or injured person—in order to get the tax benefit.)
3. Set Up Generation-Skipping Transfers
Estate-planning attorney Paul Arslanian of Bloomfield Hills, Mich., suggests taking advantage of generation-skipping transfers (GST) via IRS form 706. Grandparents can transfer up to $1 million (a couple can transfer up to $2 million) to grandchildren, escaping estate taxes that would be incurred by the skipped generation when inheriting your estate.
There's a common misnomer that GSTs provide few benefits to the generation skipped. ("It's not skipping anyone but the IRS," Arslanian says.) Assets can be left in a trust and structured so that the skipped generation receives for lifetime the income and principal of the amount put in trust, which upon death of the skipped generation goes to the grandchildren. These trusts also offer protection from creditors of the skipped generation, and they can prevent a divorcing spouse from confiscating the trust funds. A grandparent can divide the proceeds in a GST trust among various grandchildren.
Share
preview