October 24, 2019
In our experience as estate planning attorneys, we know that grandparents love giving gifts to their grandchildren. For our clients able to make significant gifts to their grandchildren, they find it rewarding to help their grandchildren with educational expenses and other major life purchases.
Over the years, we have come to appreciate that (understandably) few grandparents understand how best to make those gifts, from an estate planning and tax perspective. Few grandparents are aware of the issues affecting major gifts. In this article, we will discuss some of our concerns, some issues, and some suggestions for improved grandparent gifting.
Give Yourself Peace of Mind
A properly crafted estate plan can give you peace of mind, knowing your assets and family are well protected. Our estate planning lawyers will help you get there.
To be clear, this article is not about small holiday or birthday gifts. Giving smaller routine gifts for holidays, birthdays, and other occasions rarely present a concern. Those smaller gifts only become an issue when a grandparent is facing a long-term nursing home or assisted living stay. When we say grandparent gifting, we mean gifts of significant value.
Grandparent Gift or Loan?
The estate planning laws in Wisconsin are clear that the intention of the transfer of assets must be very clear. If you want to give a gift to your grandchildren, tell them so in writing. If you’re extending them a favorable loan, put that in writing too. This written record of your intentions is very important.
Considering Gifts to Grandchildren
The following are a few items to consider and follow when looking to give major gifts to grandchildren.
- Is the gift an advance that should offset any future inheritance on the grandparent’s death?
- If the answer to the above question is “Yes”, it is important that the grandparent’s will or trust be updated to reflect this offset.
Considering Loans to Grandchildren
The following are a few items to consider and follow when looking to make loans to grandchildren.
- Make it clear that it is a loan; document it with a written promissory note.
- Is the loan to be forgiven at death or must it be repaid even after the grandparents death? The answer should be reflected in the grandparent’s will or trust, especially if it is forgiven at death. The promissory note should reflect also if it is forgiven at death.
- When considering loans to grandchildren, it is critical to understand that if you need Medicaid to pay for nursing home or assisted living care, any gift within five years of applying for Medicaid will be an issue. (Please see below for further details.)
Sharing Equally or Not
In our experience, some grandparents want to share equally with all of their grandchildren. Other grandparents take into consideration the individual needs or challenges of their grandchildren and choose not share in that way.
For those seeking to grandparent gift equally, you will need to offset and equalize gifts. This is especially true where grandparent gifting to date has not been equal to all of your grandchildren. This will need to be done in your will or trust.
Before giving unequal gifts, we invite you to consider the implications and discuss estate planning solutions with an experience attorney.
Medicaid and Long Term Care Costs
Any significant gifts made within five years of applying for Medicaid for nursing home or assisted living long term care costs present a major issue. Gifts within five years of applying for Medicaid will result in penalty periods where Medicaid will not pay for long term care costs. Although this topic is beyond the scope of this article, whenever planning on making significant gifts, a grandparent should speak with an estate planning attorney to discuss the best way to accomplish these gifts, and the relevant Medicaid laws and time periods.
We regularly highlight for our clients that the IRS laws on taxable gifts are entirely separate from Medicaid gifting laws. Medicaid does not have a gift tax exclusion.
Is Your Gift a Taxable Gift?
Generally, a gift of $15,000 or less per grandchild per year is not taxable. Each grandparent can take advantage of this gift tax exclusion. As such, two grandparents together could give $30,000 in total to a grandchild in one year without it being a “taxable” gift.
In addition, the $15,000 or $30,000 taxable gift exclusion limits can be exceeded without paying any actual taxes for most grandparents. Rather, the amounts over these limits require reporting the gifts to the IRS, causing a reduction of how much can be left estate tax free at death. For most grandparent’s, larger gifts will not result in any gift tax or estate tax.
Although it can get complicated, many of our clients who want to do significant grandparent gifting, do so with large lump sum gifts without paying any gift or estate tax. The advantage of a larger one time gift, if done properly, can be long term Medicaid protection after five year.
Educational Gifts and 529 Plans
Often grandparents set up a 529 College Saving Plan for grandchildren. The grandparents are often the owner of these plans.
However, what many advisors and grandparents do not consider is nursing home or assisted living implications and Medicaid. If the grandparent is the owner of the 529 Plan, this will be an asset of the grandparent. The grandparent has the power to pull money from the 529 Plan into the grandparent’s name. That asset can be lost to a nursing home or assisted living when Medicaid is needed.
A better solution may be to have a responsible parent set up the 529 Plan. Then the grandparent gifts to that college savings plan. Any gifts made to the 529 Plan owned by a responsible adult – and not by the grandparent – can obtain long term care Medicaid protection five years after the gift was made.
Custodial Accounts or Trusts
Grandparents often set up custodial accounts in the name of a grandchild and make gifts to these accounts. This can work for smaller amounts and gifts. However, the grandchild will be able to receive, control, and spend these assets at age 18 or 21, regardless of the grandchild’s life circumstances.
Placing a large amount in an account that the grandchild owns and that the grandchild will control at the age of 18 or 21, is normally not the best solution. Over the years, we’ve seen more than a few grandchildren make unwise decisions with this money when they reach the age of 18 or 21. We often invite our clients to consider the structure of a trust when leaving significant money directly to a grandchild.
Estate Planning and Trusts for Grandchildren
Some of our grandparent clients want to help their grandchildren get off to a solid part by helping them through estate planning. Trusts are often the preferred method for gifting where the gifted funds will not be immediately applied towards certain items such as a house purchase, a wedding, or college tuition and fees. Our preferred approach includes setting up either a revocable or irrevocable trust that the grandparent controls, or a Medicaid trust that will be protected from long term care costs after 5 years.
Any subsequent significant gifts for a grandchild are then made to this trust. The trustee of your choice can then control the gifted funds, in trust, and apply them as you want. For example, a trust might specify that the gifted funds should be used for college expenses or health care expenses.
When the grandchild reaches a certain age, for example 25 or 30, the grandchild will receive any funds left in trust, unless the grandchild has drug, creditor, or other critical issues. In those instances, the trustee can hold back the funds until a later date.
Experience Matters when Grandparent Gifting
As noted above, there are a number of critical considerations when making significant gifts to grandchildren. At Wokwicz Law Offices, we have decades of experience helping grandparents establish appropriate estate planning trusts for gifting to grandchildren. We also have decades of experience supporting outright gifts to children and grandchildren in light of Medicaid implications.
We invite you to contact us for help preparing your next major gift or loan for your grandchildren.