Grandchildren are a blessing. The joy they bring to the lives of their grandparents is immeasurable–all the more so for the fact that all hard work is left to their parents! Whether you have grandchildren now or are preparing to welcome them into the family, that opportunity to just sit back and connect with them will never get old.
A great many grandparents like to indulge their grandchildren with a certain financial generosity. It’s not uncommon, either, for grandparents to wish to watch their grandchildren enjoy their inheritance in the present, rather than leave the assets to be handed down after they are gone.
Of course, you will need to put some thought into it to ensure that your gift doesn’t become a headache. Below are 7 important points to consider before handing over any envelopes full of cash:
Is the gift well-defined?
No few grandparents hand over the money with no strings attached, but there are other options in which it is important to clarify the terms in writing. Particularly if the gift is meant as a loan or an advance on an inheritance, be sure to document your intentions.
Is everyone treated fairly?
No, you need not treat each grandchild entirely equally, but take great care to be considerate in your gifting. There is nothing uncommon in a grandparent being closer to one grandchild over another, but there is always a danger of discord that may arise from a gifting strategy one child sees as unfair. It is important to give real thought to how you give your money to your grandchildren, both during your life and through your estate plan. If you are going to give different distributions, doing so discretely will not only make your relationship with your grandchildren easier, it will likely make their relationships with each other easier, as well.
Is there a tax burden?
Don’t worry too much, the threshold for the federal gift tax is relatively high and the majority of grandparents are unaffected. The threshold for the tax is currently $5.25 million–a number that doubles for married couples. Note, however, that any gift in excess of $14 thousand each year (doubled again for a married couple) requires that a gift tax return be filed. If you do end up using part of all of the exemption for federal gift tax, that reduces the amount of exemption left for your estate tax, as it is a unified gift/estate tax exemption.
Is their education paid for?
While the experience of watching your grandchildren make the most of your gift can be rewarding, don’t forget to give some thought to their education. Particularly as college tuition costs so much these days, a direct payment to their educational institution is often a tremendous boon for them. There are other advantages: these payments do not count towards your federal gift tax exemption, nor are the contributions limited. If your grandchild has yet to enroll, a 529 plan helps your grandchildren (and their parents!) save for college with a tax-deferred account. So long as that money is used for education, it will never be exposed to tax.
Is your budget able to handle it?
You would hardly be alone if you find yourself being a little too generous to your grandchildren. The temptation can be powerful, but take care not to neglect your own needs. A balance should be struck now so that your children and grandchildren don’t end up having to support you.
Is your bank account prepared for long-term care?
Given the wonders of modern medicine, many of us end up living a good many years. Research has shown that many Americans will need long-term care at the end of their lives and, if the costs of long-term care are more than your assets can bear, any gifting you have done could have made you ineligible for Medical Assistance benefits for five years. Make sure to take this into account.
Is a trust right for you?
If you have misgivings about showering your grandchildren with gifts of cash or assets, you’re not alone. You know your grandchildren best–money can be especially dangerous if they are prone to bad behavior or excess. What’s more, simply dropping the cash in their lap may impede the development of their work ethic and moral character. To ensure that your gift imparts all the benefits you desire, a trust may be just the thing to leave assets to your grandchildren without need to fear for their future–protected from bad behavior, bad marriages, and bad credit.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today at 612-206-3701 or reach out via our contact page to schedule a time for us to sit down and talk about this in a family estate planning consultation, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security.
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