I just became a grandparent for the first time! It is such a joy and I am absolutely certain he is the cutest little fellow out there.
Like most grandparents, I’m focused on the here and now – helping the new parents get settled, cooking meals and doing laundry for them, and sneaking in as much time holding the new baby as I can. But in the back of my mind I’m fast-forwarding a decade or two – how will they afford college, will this child and their future spouse be able to afford a home, how will they get by?
So, as soon as things settle down I’ll recognize this as one of those life events that require me to drag my husband to the kitchen table for that talk – we need to update our estate plan.
Of course, we have a trust and have it set up to provide as many tax saving provisions as we can. We are taking advantage of both of our exemptions and are trying to maximize the elimination of capital gains at death.
Now that we have a grandson, we also want to consider a Generation Skipping Transfer Trust. In this trust, which is usually irrevocable, assets skip a generation and are given to someone (not just grandchildren) who are at least 37 ½ years younger than you. What this does is skip one generation of taxes. If assets were given to your children and then they were to leave it to their children, it would be taxed twice with the standard estate tax being applied each time.
Using this form of trust will, however, will flirt with the Generation Skipping Transfer Tax. This tax was set up to prevent wealthy families from tax avoidance. Congress introduced the additional Generation Skipping Transfer Tax which is applied on top of the standard estate tax at a flat rate of 40%. The good news is that the person giving the gift is entitled to a lifetime exemption, currently $13.99 million for single taxpayers or $27.98 million for couples filing jointly. You should note, however, that those figures are scheduled to be cut in half (approximately) at the end of 2025 barring any intervention by Congress. While we wait to see what Congress will do, or not do, we can think about pushing assets further down the generations. In other words, instead of using assets to benefit our children, we can skip their generation and provide for the next. By so doing, our children have room to grow their assets without risking an estate tax.
It is important to note that any growth related to the assets being transferred are also shielded from taxes. If you place securities or other appreciable assets in a trust for a grandchild, and the assets grow, the additional value when passed to the recipient is not taxed as part of the estate tax. The capital gains taxes still apply as do income taxes on income generated by trust assets. So, you will want to be careful to ensure that the taxable income is paid out and taxed at an individual beneficiary’s rate, not the trust tax rate.
If your assets are not likely to exceed the estate tax rate, you can transfer a lesser amount to the GST trust. Additionally, while we’re on the topic of gifts to grandchildren, or really anyone, remember that current tax laws allow individuals to give gifts of up to $19,000 per year to as many recipients are you would like without any tax consequences. Spouses may match that amount, so a married couple could give a gift of $38,000 each year to a child, grandchild, niece, nephew, friend, or anyone else without any taxes being due. So, unless your estate is well into the millions, this provides a very valuable means of distributing your wealth over time.
Of course, I need to add some level of caution. Do you really want a 12-year-old to receive a gift of $19,000? Frankly, many 25-year-olds might not handle that well, or certainly not as you intended. Consider using a simple gifting trust for the benefit of the child. Funding a college 529 plan is a great way to pass on wealth but limit the manner in which it is used. Similarly, if someone is facing huge medical bills, you may be able to pay those bills directly on their behalf and not have the amount you pay on their behalf taxed as a gift.
One final note – if you want to leave smaller gifts such as making sure your grandchild receives a special piece of jewelry or perhaps a coin collection, it must be spelled out in your will or in your trust. If you simply rely on telling someone your intentions or working off a handwritten list there is no guarantee that things will end up with those you intended to receive them.
That’s a lot to cover. Give me a minute to have that kitchen table conversation with my husband and then give me a call and we can chart your course. I look forward to swapping stories about grandchildren and then getting your estate plan in shape to care for them, Give me a call at 847-253-8800.