Gifts to Grandchildren
Many grandparents want to give their grandchildren gifts. Giving gifts to grandchildren is also advantageous for the grandparents’ estate because it may reduce the overall size of the estate and lower the estate tax burden.
There are various types of gifts that grandparents may give to their grandchildren. Some of these gifts include:
- A monetary gift.
- Starting a bank account for the grandchild.
- Directly pay for the grandchild’s expenses.
- Set up an Individual Retirement Account (IRA) for the grandchild.
- Set up a college fund, a 529 account, or purchase college for the grandchild.
- Set up a gift trust.
- Savings bonds.
The grandparents may give their grandchild a straight monetary gift of up to $11,000 each year without subjecting the grandchild to tax on the gifted money. The grandparents also do not have to report the gift. Each grandparent may give each of their grandchildren $11,000 per year. For example, the grandparents may give a total of $66,000 to their three grandchildren if each grandparent gives each grandchild the maximum monetary gift of $11,000.
School or Health Care Costs
The grandparents may also opt to directly pay for the grandchild’s health or school costs. With these types of costs, the grandparents are not limited to the $11,000 limit as they are for monetary gifts. The grandparents must make sure to directly pay the health care provider or school the money owed otherwise the gift will be deemed as a monetary gift and the grandparents will be limited to only giving $11,000 to the grandchild each year.
There are several different types of accounts that may be set up for the benefit of the grandchild. Accounts may be set up under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minor Act (UTMA). The account is set up in the name of the grandchild and the grandchild would then bear any tax liability associated therewith. Typically, states restrict UGMA investments to life insurance, cash and certificates of deposit. Usually UTMA accounts permit a variety of investments, including mutual funds, stocks and bonds.
The grandparents may choose to create a gift trust for the benefit of the grandchild. The trust will reflect the grandparents’ express wishes about when the income and principal available to the grandchild. Further, the trust may even dictate how the funds are to be spent. For example, the trust may limit the use of the principal for educational purposes only.
529 Accounts and IRAs
A 529 account is a type of account that one may set up for the benefit of educational purposes for the grandchild. The funds contributed to the 529 account are invested to pay for the grandchild’s college tuition, room and board, or other expenses. The grandparents may each contribute a maximum amount of $11,000 per year into each grandchild’s 529 account. However, if the grandchild uses the funds for any purpose other than higher education, the earnings are taxed as ordinary income to the account owner, the grandparents.
Grandparents may also contribute to the grandchild’s regular and Roth IRAs. The grandparents may also purchase savings bonds for the benefit of their grandchild. There are certain types of savings bonds that if used for educational purposes the grandchild will not be taxed on the money when the bond is cashed in.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.