Gifting to grandchildren

By Frank Minuti, CPA

Prior to 2010 a taxpayer could only gift or bequest $1,000,000 to his or her grandchildren ($2,000,000 for a married couple) without incurring a generation skipping transfer tax at the rate of 45% on amounts in excess of the above amounts. The $1,000,000 was not per grandchild but is cumulative for all grandchildren. For 2010 the amount that could be gifted without incurring a generation skipping transfer tax was unlimited however the amount (combined current and past gifts) that exceeds $1,000,000 would incur gift tax at a rate of up to 35%.

The December 2010 tax act set the cumulative amount that a taxpayer can gift or bequest to grandchildren in 2011 and 2012 to a total of $5,000,000 ($10,000,0000for a married couple) before incurring the generation skipping transfer tax at a 35% tax rate. For taxpayers with substantial wealth, the tax act allows up to $10,000,000 of the grandparents wealth to bypass the estates of their children and pass directly to their grandchildren. This has three major benefits to the family group:

1. The dollars are out of the grandparent(s) estate now before the current estate and gift tax rules expire at January 1, 2013.
2. Any growth in value of the assets from the date of the gift to the date of death of the grandchildren receiving the gift are not subject to gift or estate tax but the assets are included in the estate of the grandchildren.
3. The grandchildren get the use and enjoyment of the assets now while you are still with them.

Often taxpayers are concerned that the grandchildren are either too young or there may be spending concerns related to their ability to handle money. I discussed this with Dennis Lippitt of Baskin & Grant, LLP [(831)425-8999]. Mr. Lippitt is certified by the State Bar of California as a legal specialist in estate planning, probate and trust matters. In cases like this, he often recommends that the assets being gifted be put in a trust for the benefit of the grandchildren, although a separate trust is generally required for each grandchild.

The trust could pay out the income earned on the assets annually until the child reaches a certain age and then the assets could be distributed in one distribution or in a series of distributions as the child reaches different ages. The trust generally has a clause that allows early distributions in certain situations. These situations could include health, college tuition and costs, down payment on a personal residence, marriage or any other factor that the grandparent(s) decide to include in the trust.