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Giving While You’re Living If you pass along some of your wealth while you’re still living, you can witness the joy your gift generates. Each year, you can give up to $12,000 per person to as many individuals as you want without any federal gift-tax consequences ($24,000 if your spouse agrees to split your gift).* Giving money now may help your grandchildren pay for college, purchase a home, or get a head start on their retirement savings. For larger gifts, you can use a $1 million lifetime gift-tax exemption to reduce or avoid gift taxes on the transfer. Try a Trust If your grandchildren are still minors, or you feel they don’t have the maturity or experience to handle a significant sum of money, you could give to them through a trust. You can set up a trust during your lifetime or through your will. Since you’ll be able to choose the trustee and set the terms of the trust, you can determine when and under what conditions your grandchildren will receive the trust assets. If you set up a trust through your will, be sure to consider potential estate taxes. Currently, there is no federal estate tax on a taxable estate of up to $2 million. In 2009, individuals can transfer up to $3.5 million estate-tax free. The estate tax is scheduled to be repealed in 2010, but then return in 2011 with only a $1 million estate-tax exemption. Use of the $1 million lifetime gift-tax exemption reduces the exemption available to your estate. Also be sure to ask your tax advisor about potential generation-skipping transfer tax. Set Up a Section 529 Plan If you want to help your grandchildren pay for college expenses, you might want to invest in a Section 529 plan. You’ll need a separate account for each grandchild since an account can be used for only one person’s benefit. The plan assets will potentially grow tax deferred and won’t be subject to federal income tax if they’re used for qualified educational expenses. The money transferred to the plan won’t be included in your estate but will count toward the $12,000 gift-tax annual exclusion.* However, with a Section 529 plan, you can give up to five times the exclusion amount in the first year gift-tax free. This is known as “front-loading.” If you front-load your gift, you then can’t use the annual exclusion amount for additional contributions for that grandchild for the next four years, except to the extent of any inflation increase in the exclusion. Consider a Coverdell Another way to help pay for your grandchildren’s education expenses is to set up a Coverdell education savings account. You can establish a Coverdell for grandchildren who are under age 18, and you can contribute $2,000 each year. Assets in a Coverdell account can be used for qualified elementary and secondary education expenses, as well as college costs. Contributions are phased out for higher income taxpayers. Your financial professional can explain your gifting options and their tax consequences and help you design a strategy that matches your goals. * The $12,000/$24,000 annual exclusion is periodically adjusted for inflation. |
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