Gifting to Grandchildren
Passing on money to children and grandchildren is not only a nice thing to do; it can also help you reduce your estate taxes. In this article, Credit.com shows you the best ways to use Generation Skipping Transfers and Gift Tax Exclusions.
Tip: Use the Gift Tax Exclusion
You can give each grandchild up to $12,000 tax-free every year under the current tax law. Married couples can both make such a gift to each grandchild once a year. This tax exemption includes gifts toward a 529 savings plan, a custodial account, or plain old cash. These gifts are not counted as taxable income to your grandchildren and do not count toward the lifetime $1 million gift tax exemption limit. The best way to make these contributions is directly into a gift trust set up with the help of an attorney.
Tip: Pay medical expenses or tuition directly
Consider paying for a grandchild's college tuition directly as a way to save on taxes. Education costs and medical expenses are tax-exempt. Just keep in mind that you'll need to pay the university or health care provider directly in order to get the tax benefit.
Tip: Donate to a custodial account
Under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), you can make gifts to a custodial account set up by parents of a child under 18. Gifts to a custodial account are counted as taxable income to the grandchild, however. You can gift cash, investments, real estate, and more through these accounts. Speak to an investment advisor before opening this kind of account, as there are a few potential traps to avoid.
Tip: Consider a Generation-Skipping Transfer
IRS form 706 allows grandparents to transfer up to $1 million (or $2 million for a couple) to grandchildren without any estate taxes. GST trusts also allow you to split the money between grandchildren.
Tip: Don't forget Savings Bonds
Savings Bonds are the most popular type of security in the world for a reason! Bonds are free from most taxes and increase in value monthly. Plus, you can receive extra benefits if the bond is redeemed to pay for college expenses. You can compare different kinds of bonds online at SavingsBonds.gov.