Do you have grandchildren graduating this summer? Are you financially stable and want to make gifts for your graduates? In this blog, OC Wills & Trust Attorneys will explain estate planning gifting strategies and address the tax and legal issues of making significant gifts.
When Do You Want to Make the Gift?
When making a gift, you must decide whether the gift will be in your will or during your lifetime. A lifetime gift is an asset or cash that you may pass on over your lifetime. In 2022, an individual may give up to $12.06 million throughout his or her life without paying a gift tax. With a lifetime gift, you will experience the excitement of your grandchild’s use of the present. However, if you anticipate needing Medicaid or potentially needing that money, you might consider making the gift a bequest in your will. When government programs consider your eligibility for their services, they assume your assets to include gifts you have passed on in the past five years.
How Will It Affect Taxes?
Those with large estates and interested in decreasing future estate tax liability may consider gifting to their graduating grandchildren to remove money from their estate. From 2019 to 2021, an individual may give up to $15,000 in property or cash to family members without paying a gift tax, and this annual exclusion doubles for married couples. If an individual or a married couple exceeds the annual exclusion, it should be reported on the IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. Thus, a grandparent may award their four grandchildren $60,000 a year. The annual gift removes property from their estate. Our team of experienced estate planning attorneys can help plan the tax consequences of gifting to your grandchildren during this graduation season.
What Relevant Form Should You Use?
There is the possibility of making a gift directly to a grandchild. By making a gift outright, the grandchild is given complete control over how the funds are spent. In this instance, you are not legally allowed to stop your grandchild from making any desired purchases.
If you intend the gift to fund a beneficiary’s higher education, you may consider depositing the money in a 529 Plan, which is a tax-advantaged savings plan that’s designed to encourage savings for future cost of education. Legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. You may contribute up to $80,000 for a beneficiary every five years without reducing your annual exclusion. With the 529 plan, you are permitted to contribute five years of annual exclusions for the beneficiary.
You may consider depositing the gift under the Uniform Transfer to Minors Act (UTMA) if the beneficiary is a minor. UTMA is a type of custodial account: the individual opening the account manages the investments, assets, or funds. The account allows you to save assets or money tax-efficiently. The custodian may only withdraw money from a UTMA if it directly benefits the beneficiary. Once the beneficiary reaches the age of majority, 18 years old in California, he or she receives legal control of the account, and the custodianship is terminated. The trust will provide the creditor protection and customization of future expenditures, such as higher education.
As you can see, there are several matters to consider when gifting to your grandchildren during the graduation season. With proper planning, you can avoid tax consequences and find the best plan to benefit your grandchildren. If you have any questions about gifting or would like to discuss your options, Contact us today to schedule a complimentary consultation at OC Wills & Trust Attorneys.