When you start to think about passing on wealth to your grandchildren, there are a few hidden pitfalls that you need to consider. In addition, you can both pass on the wealth and reduce your taxable estate at the same time.
Pitfalls of Giving to Grandchildren
The IRS imposes an onerous tax on grandparents who pass on wealth directly to grandchildren. Called the generation-skipping transfer tax, it requires grandparents to pay a significant tax on the value of assets given to their grandchildren. The tax is imposed in addition to other estate and gift taxes. For obvious reasons, you should try to avoid paying the generation-skipping transfer tax (GSTT).
Fortunately, there is an exemption to the generation-skipping transfer tax available if your total gifts to grandchildren are below a certain amount. Further, you can give up to $15,000 to each grandchild per year without paying gift or generation-skipping transfer taxes. With careful planning, you can give to your grandchildren during your lifetime.
Techniques for Reducing Your Taxable Estate While Giving
When giving to your grandchildren, also consider how to reduce your taxable estate so that all of your heirs benefit. First, you can take advantage of the annual exclusion of $15,000. Even if you give your grandchildren only small gifts each year, these can add up over time. Giving gifts of money or property under the annual exclusion amount reduces your total estate while helping your grandchildren.
Further, you could consider setting up a trust or trusts to manage assets for your grandchildren’s benefit. If you contribute assets to the trust totaling less than the generation-skipping transfer tax exemption, you can potentially avoid any taxes that would reduce the amounts your grandchildren receive. Special types of trusts can help too. To ensure that you set the trust up properly and limit tax liability, talk to an estate planning attorney.
Some grandparents decide to give money to their children, with the intent that the children give some of the money to the grandchildren. This strategy avoids the GSTT, but it has other risks. For example, you have no guarantee that your grandchildren will receive the money. Your children might spend it, they might leave it to someone else in their wills, or it could be eaten up by taxes when your children pass away. If this is a concern for you, consider contributing to a college fund or setting up a trust rather than making direct gifts. If this is not a concern, then at a minimum speak to your children about your intent that some of the money ultimately go to your grandchildren.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.