Just about every grandmother and grandfather wants to help out his or her grandchildren, often financially. This can take the form of birthday and graduation gifts, paying for summer camp, helping with college tuition or a bequest in a will. Smaller expressions of love do not raise many difficult concerns.
However, larger gifts can get complicated. They raise a number of questions and concerns, including:
- Fairness among grandchildren (and children)
- Inappropriate spending by grandchildren
- Financial aid at college
We'll discuss each in turn.
Taxation of Gifts
People often have heard that they are limited to annual gifts of $10,000 (or another figure) per recipient. This refers to the gift tax exemption, which had been set at $10,000 but which has risen to $14,000 due to cost-of-living increases. This can be a good rule of thumb for many people, but it's not really a limit. The way the law works, any gifts to an individual in a calendar year in excess of $14,000 must be reported on a gift tax return. However, no gift tax is due until the grand total of gifts made in excess of the annual limit exceeds $5.34 million (in 2014). So very few taxpayers need to be concerned about the gift tax. That said, keeping under the limit avoids the need to file a gift tax return.
Many taxpayers are unaware that a further exemption to the gift tax applies to payments made for another person's education or health care expenses. In other words, there's no limit on how much grandparents can pay for their grandchildren's education and health care costs as long as the payments are made directly to an accredited educational institution or health care facility.
While most taxpayers today do not have to worry about federal estate taxes, those with larger estates, or mid-sized ones in some states, may want to make gifts as part of their tax planning. They may wish to give $14,000 a year to each of their children or grandchildren but in the case of grandchildren they may not want them to receive the funds today while they're still too young to be financially responsible. A number of our clients have chosen to make their gifts to a "grandchildren's" trust which provides the tax benefits of gifts, but permits the trustee to manage the funds as a pooled fund for the educational needs of the grandchildren as a group.
The final issue with respect to taxes has to do with their affect on the recipient. Fortunately, gifts are not treated as taxable income. So the grandchild receiving the gift does not have to report it or pay taxes on it.
As is the case with beauty, fairness is in the eye of the beholder. Is it more fair to give equally to all children or to favor those with the greatest need or those closer to the grandparent. A grandparent may be very close to grandchildren who grew up down the street and hardly know those raised across the country. Should they all be treated the same? If not, will it look like favoritism and create resentment? Some children do better financially than others, meaning that their children -- the grandchildren -- can be raised in different circumstances and have different educational opportunities. Why shouldn't grandchildren level the playing field to some extent?
However, favoring some grandchildren over others can create certain difficulties. Other grandchildren may resent what looks like favoritism. Parents may feel that grandparents are intervening in their own relationship with their children or interfering with lessons they hope to teach about money and spending. Some grandchildren may become dependent on a grandparent, continually inveigling him for funds. When going beyond traditional birthday and holiday gifts, it behooves grandparents to discuss them with the parents of their grandchildren.
Many grandparents assist their grandchildren unequally during life -- recognizing the grandchildren's varying needs and circumstances -- but treat them equally in their estate plans. Wills and trusts are permanent, public documents which can leave feelings of resentment if beneficiaries are treated differently. Often grandparents leave relatively small amounts in their wills for grandchildren, for instance $1,000, $5,000 or $10,000 each, depending on the size of the grandparent's estate, enough to show that the grandchild is remembered, but not so much as to change their way of life.
Other grandparents leave a percentage of their estate to be split equally among grandchildren. Often this takes the form of giving all the grandchildren the same share of as a child. In other words, if a grandparent has three children, he will leave each child a quarter of his estate and another quarter to be divided equally among his grandchildren.
Another issue for some grandparents, especially where there's a wide age range among grandchildren, is how to support their education equally. A grandparent may have assisted with the college tuition of her older grandchildren and want to do so for the younger grandchildren when they go to college in the future. A grandchildren's trust similar to the one described above for wealthier grandparents doing tax planning also can be useful as an educational fund for grandchildren.
When leaving a potentially large amount to a grandchild, a grandparent needs to consider whether the money should be paid outright or held in trust for the grandchild's benefit. Depending on the age of the grandchild -- and in any family there can be be a couple of decades between and oldest and youngest grandchild -- she may be more or less ready to receive a large chunk of money. Most estate planning documents provide that the estate or trust can hold the funds for a beneficiary until she reaches a certain age, often 25 years old, the grandparent can choose whatever age she feels makes sense. In fact, a trust that continues for the grandchild's life offers continuing creditor, divorce and tax protection, though the administrative costs of such trusts can be excessive for small amounts of funds.
Receiving a gift or a bequest at the wrong time can adversely affect a grandchild's eligibility for financial aid in college.Typically, college's will prioritize funds available to pay tuition, looking first to the student's own funds (including 529 plans) and earnings and second to his parents' savings and income. The FAFSA form that applicants for financial aid must complete does not ask about trusts. As a result, in addition to questions about the financial maturity of younger grandchildren, potential eligibility for financial aid can be an additional reason for grandparents to leave funds going to grandchildren in trust until they reach age 25 or older.
A final concern for grandparents to consider when making lifetime gifts to grandchildren is to make sure that they keep enough back for their own needs. But, if they can afford to do so, grandparents can provide great assistance to grandchildren who may need just a little financial assistance get through the stresses and pressures of modern life. Grandparents just need to consider the issues of fairness among all grandchildren, the maturity of the their grandchildren, how assistance fits with the parenting of their children, and whether funds she be given outright or in trust.