Simple Low-Cost Estate Planning Ways to Help Grandchildren

For many of my readers, helping the grandkids is a high priority after ensuring their Estate Planning affords their own financial independence. There are so many ways to help beyond making cash gifts and setting up Uniform Gifts/Trusts to Minors Accounts. In fact, those two widely-used methods often are far from the best ways to help.

Most people have two additionalestate planning goals when helping the grandchildren. They want as many tax benefits as possible, and they want to ensure the money isn’t wasted. Here’s a review of the best ways to help grandkids that meet those goals.

529 plans. College savings plans authorized under section 529 of the tax code are one of the best giving vehicles. Most states now offer multiple 529 plan options, and any person can set up an account and contribute to it for the benefit of someone else. Contributions qualify for the annual gift tax exclusion. In addition, up to five years’ worth of exclusions can be used in one year for a tax-free lump sum contribution of up to $70,000 ($14,000 times five) per beneficiary. The gift is excluded from the donor’s estate unless he dies within five years of making the gift. Under many state plans the owner has some choice over how the account is invested.

Income and gains in the account compound tax free. Withdrawals are tax free when they are used for qualified education expenses of the beneficiary.

A distinct advantage of the 529 plan is the owner can retrieve assets from the account for any reason. There is no tax penalty if the owner asks for the return of the assets, though the plan sponsor can impose a penalty of up to 10%. The owner also can change the plan beneficiary at any time. So, if a grandchild turns out not to be college material or interested in college, a different grandchild or any other person can be named beneficiary.

Some states limit the duration of an account to a number of years or to the 25th or 30th birthday of the initial beneficiary. Others have no time limit. Check out details of different plans and the rules at www.college-savings.com. (Ignore the hyphen.)

Estate Planning Strategy #1

Bill paying assistance. You can give by making direct payments on behalf of the beneficiary. The grandchild (and the parents) never touches the money, and the gifts pay for what you intend. Some people pay directly for education, vacations, summer camps, furniture, clothing, cars, and other expenses.

Direct payments qualify for the annual gift tax exclusion. As mentioned in this month’s Estate Watch, qualified education and medical expense payments made directly to the provider qualify for an unlimited gift tax exclusion.

Estate Planning Strategy #2

Home equity match. This works for adult grandchildren who have accumulated some home equity and credit. It’s worth considering when a grandchild has a significant expense coming up. You want to help, but you don’t want to pay the entire amount at once or want to stay within the annual gift tax exclusion. Or you want to help improve the grandchild’s credit rating.

The strategy is for the grandchild to make the purchase with a home equity loan. You tell the grandchild you’ll make all or part of the loan payments. You can make payments directly to the lender or to the grandchild.  But you aren’t on the loan documents or legally liable for it. A bonus for the grandchild is that, since the loan is his or her legal obligation, he or she deducts the interest.

Estate Planning Strategy #3

Expense matching. You’re aware that some donors to charities make challenge matches. They offer to match, up to a maximum amount, whatever gifts the charity raises from other donors for a specific purpose or within a time frame. Parents can do the same with children. If the children need or want a car, for example, the parents can offer to match whatever amount the children spend. The match does not have to be dollar for dollar. You can offer to pay fifty cents for every dollar the children pay or some other ratio.

This approach allows the grand children to buy more than they could on their own, but they have “skin in the game” so are more likely to make the purchase carefully and take care of the item.

A variation, to give youngsters some incentive, is to match income and earnings up to a level.

RW November 2013