Tax-advantaged ways grandparents can give to grandchildren

Anchin in the NewsSeptember 10, 2017Published by Don't Mess With
Anchin Partner Featured: Jane E. Bernardini, CPA, PFS

Tax-advantaged ways grandparents can give to grandchildren

Jane Bernardini, Partner and member of Anchin Private Client, shares some tips on tax advantages for grandparents providing support for future generations.

...The tax code offers a variety of ways for grandparents to give to their grandchildren without tax consequences.

Here are Bernardini's thoughts on some of these opportunities, such as gifting, contributing to 529 educational savings plans, paying health care expenses, serving as a grandchild's main source of support and establishing a grantor trust.

Tax-free gift giving: Most high net worth families are familiar with the annual federal gift tax exclusion, which is the amount an individual can gift to another individual without incurring a gift tax. That's $14,000 for 2017 (it's adjusted each year for inflation) and doubles to $28,000 for married jointly filing couples.

For grandparents that have a greater role in their grandchildren's care, the combined gift exclusion may woefully be less than the actual amount of support they provide and the tax benefits afforded to parents. Fortunately, there are some provisions that can permit grandparents to provide support for younger generations while minimizing the tax burden.

Paying for college: Payments made directly to qualified educational programs do not count against the annual gift tax exclusion amount.

And although gifts made to 529 plans do count against the annual exclusion amount, grandparents may make five years of contributions in one lump sum payment. This means a single grandparent could pay $70,000 to a 529 plan and it will be spread over five years (while married grandparents can contribute $140,000).

If the maximum amount is paid, the grandparents cannot make any further gifts to that individual for the next five years.

Covering medical costs: Grandparents may also treat qualified health care expenses just as they do qualified education expenses. Note that the medical amounts must be paid directly to the health care provider.

The annual exclusion amount, combined with education and health care expenses can certainly go a long way in alleviating any gift tax burden.

Providing primary support: When grandparents' support goes beyond education and health care, a single grandparent may be able to use head of household filing status. This is allowed as long as the grandchild lives with the grandparent for more than half of the year.

In such situations, filing as a head of household can put the grandparent in a lower tax bracket, which means that they will be eligible for a higher standard deduction and lower overall income taxes.

In trusts we trust: Another option for grandparents is to establish a 2503(c) trust for each grandchild under their care. Grantors may make gifts to the trusts up to the annual exclusion amount.

Even though those dollars may be for future interest — such as when the child turns 21 — the grantor can still treat the gift as having "present interest."

The bottom line with all these tax opportunities, says Bernardini, is that grandparents who play a greater role in providing for their grandchildren's financial support can capitalize with careful, tax-smart planning.

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