Gifts to Grandchildren using Gift Trusts
When you want to make a gift to your grandchild, what’s the best way to do that?
If you make an outright gift to the grandchild, you give complete control to the grandchild. Of course, if the grandchild is a well-adjusted adult that may be fine. But if the grandchild is a minor or you’re concerned about how the money will be spent, that is not a good option.
Another problem with an outright gift is that it could affect the grandchild’s eligibility for financial aid.
The solution: a gift trust for grandchildren
To benefit your grandchild, you may want to consider transferring money into a trust established to benefit that grandchild. An attorney can prepare a trust that allows limited access to the income and principal for as long as you direct, and the trust can even set guidelines about how the funds will be spent.
These types of trusts for grandchildren can offer several benefits as follows:
- Gifts reduce the size of your estate, if you’re worried about estate taxes. Gifts of up to 14,000 (in 2014) into each trust created for a particular grandchild will not be subject to gift taxes.
- After the transfer to the trust, you can control the gift as as trustee and decide what type of investments to make.
- Income earned by assets transferred into the trust will be taxed to the trust, instead of to you.
- The trust can continue to grow, increasing the total gift to the grandchild.
- The trust can terminate at any age that the trust agreement specifies.
Certain restrictions will apply to these types of trusts. For example, you can’t retain the ability to reclaim the assets for yourself or for your spouse. The trust agreement is a sophisticated legal document. It should only be set up with the help of an experienced elder law or estate planning attorney. You will need to weigh the benefits of the trust against the cost of establishing and maintaining it. Your attorney will help you with this analysis and decision.
These types of trust will reduce the amount of money you can access. You should only make gifts if you are comfortable with doing so. Moreover, a gift trust for your grandchild will result in a Medicaid penalty if you need to apply for MEdicaid within five years after making the gift.
The bottom line is that you should make a gift to your grandchild (in trust or otherwise) only if you’re certain that you still have enough assets and income to provide for yourself and your spouse if you’re married.