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San Antonio Express-News Ways to Give to Others copyright 2003, Paul Premack |
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| Dear Mr. Premack: I suppose I am
one of the lucky people in the world because I have plenty of money.
Recognizing this, I try to help others, especially my grandchildren. I’ve
given each of them the allowed $11,000 this year, but two of them are in
college so the gift was not enough to cover their expenses. Also, three of
them are under ten years old and I want the money to be targeted at their
future education. Any suggestions? – L.S. Current federal law exempts from gift tax up to $11,000 per individual recipient every year. Gifts to charity can be larger than $11,000 and are deductible (with some limits) while gifts to individuals are not deductible. There are a few ways to go beyond the $11,000 limit for individuals. First, you can claim part of your million-dollar lifetime gift tax exemption. For instance, if you give $20,000 to a college-age grandchild, the first $11,000 is free of gift tax automatically. The $9,000 balance must be reported to the IRS on form 709. However, instead of paying a tax it will be charged against your lifetime exemption. As a result, you will reduce your lifetime exemption from $1,000,000 to $991,000 but pay no gift tax. Second, you can split the gift with your spouse if you are married. On the gift tax return, your spouse allows you to use the $11,000 exemption he or she could have used. So you can give that grandchild $22,000 without paying gift tax, and without using any of your million-dollar credit. Third, you can legally pay college tuition for another person without any limit on the amount of the gift if you handle it properly. You must be sure to follow these rules: 1. The exemption only applies to tuition. Any money you give to help pay for room and board, transportation or entertainment counts against the $11,000 annual exclusion; 2. The college must be bona fide; that is, it must have a full time faculty and regularly enrolled students; and 3. You must pay the funds directly to the college. If the funds are paid to anyone but the school, you have given a taxable gift. As to your issue of controlling the money you give to your younger grandchildren, you have several options. The simplest approach is to put the gift into a Uniform Transfers to Minors account, with a responsible adult as the custodian. In that way, the funds can be controlled by the adult until the grandchild turns 21. In the meantime, the funds can be used for the grandchild’s education, health care and support. A somewhat more complicated approach is to create a trust for your grandchildren. The trust format gives you more choices than the UTMA format; for instance, you can direct that the funds remain under an adult’s control beyond age 21, and you can specify exact restrictions on spending the funds. There are complex tax rules that must be followed so that the gift will qualify for the annual $11,000 exclusion, so be sure to see your lawyer about this option. Finally, you can look into 529 plans for your youngest grandchildren. The earnings and growth are not subject to income tax, and withdrawals are tax-free if they are used for qualified educational expenses. |
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| Disclaimer: This column answers a specific legal question asked by an individual in Texas. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice, as it may not meet your individual needs. It may give you a solid basis for discussion with your own attorney. You should consult with your personal attorney before you take any action on this or any legal issue. Also, please be aware that laws change, so this column is valid only as of the date it was published. This communication does not create an attorney-client relationship between the author and the reader. | |
