March 2023 Issue | Life in Order
By Noreen K. Scaperotti
There is a growing trend in estate planning to address the future needs
of not only your children, but also your grandchildren. Grandparents often want to leave something special for their grandchildren as an act of love.
What is the grandparent’s vision? What do they deem to be of value?
What do they want their token of love to be?
A consultation with an estate planning attorney can provide the answers to these and other questions to assist with creating a customized plan. Who are the children and grandchildren? How old are the grandchildren? Are there any family conflicts? What is the value of the estate? What are your grandchildren’s hopes and dreams? Do you want to gift now, during your lifetime, or after you pass? If so, how much?
There are so many questions that need legal answers, as well as various avenues to achieve your wishes. An estate planning attorney will also factor in tax considerations when creating a gifting strategy and estate plan.
The simplest approach to gifting is to give the grandchild an outright gift. For minor grandchildren, grandparents can gift into a custodial account (UTMA/UGMA). An individual can gift up to $17,000 per person per year (2023) without having to report the gift. If both grandparents want to gift to the grandchild, together they can gift up to $34,000 per year for each grandchild. You may gift above the annual gift tax exclusion amount, but if you do, then you have to file a gift tax return (Form 709).
The advantage of an outright gift is that it’s easy. It does not require the creation of a trust. For higher net worth individuals, it also provides a tax advantage. Through lifetime gifting, individuals can reduce their total estate value. In 2023 the federal estate tax exclusion is $12.9 million per individual. Married couples may file for portability, meaning that when the first spouse dies, the surviving spouse will receive the deceased spouse’s remaining unused exemption. Through portability, a married couple can pass $25.8 million.
The disadvantage of an outright gift is the grandparents cannot maintain control of the funds. For UGMA and UTMA custodial accounts, grandparents can control investment decisions while the grandchild is still a minor, but once the grandchild reaches the age of majority (18 or 21 depending on the state) the funds are turned over to the grandchild.
(Keep in mind that gifting, even below the annual gift tax exclusion amount, can interfere with Medicaid planning and eligibility)
Gifting to Pay for College:
If a college education is high on your priority list for your grandchildren, you can establish and contribute to 529 accounts for college expenses. Depending on the state, contributions can reduce the grandparents personal income tax liabilities. If a grandchild decides not to pursue a college degree, grandparents can change the beneficiaries.
Contributions grow tax deferred while in the account, and withdrawals are tax free as long as the funds are spent on qualified education expenses.
The federal annual gift tax exclusions of $17,000 per person/per year also applies to 529 contributions.
Establishing a Trust:
A trust provides more alternatives for how and when your grandchildren will receive funds. With a trust, grandparents can decide how funds are invested during their lifetimes, decide on investment strategies and select financial advisors. Grandparents can either be the trustee, or name an individual or corporate trustee, depending on the specific objectives of the grandparents.
In a trust, you state how you want the money to be managed, the circumstances under which the money can be distributed, and when it should be withheld. For example, distributions can be incentive based (i.e. graduate from school, go to college, buy a house). In addition, a trust can dictate distributions for big life moments like travel, weddings, or starting a business, which allows grandparents to be remembered in those moments even if they are no longer there. Alternatively, grandparents can provide that the trustee has discretion to distribute funds for the health, education, maintenance and support of the grandchild.
A trust protects the assets from a young, or financially immature grandchild, or maybe a grandchild with addiction or gambling concerns.
Establishing a Supplemental Needs Trust:
Grandchildren with special needs may never be able to live independently or be gainfully employed. A Supplemental Needs Trust (SNT) is a way to create a nest egg for an individual, while preserving the ability to qualify for government needs-based programs like Supplemental Security Income (SSI) and Medicaid. An SNT allows assets to be invested and used for the disabled child’s benefit to supplement government programs. The funds do not belong to the child, and therefore, are not countable resources for government programs. The funds are used to improve the quality of the child’s life.
Noreen K. Scaperotti, Esq.: Noreen is from New York’s Hudson Valley and has always dreamed of living near the beach and away from the snow. She married her high school sweetheart and has three young children. Noreen has dual citizenship from Ireland (her long Italian last name is compliments of her husband). Noreen and her family relocated to the Lowcountry in November of 2021. She is a graduate of Fordham University and Pace Law School. She is an estate planning attorney with the Mikkelson Law Firm in Bluffton, SC.