First, let us be very clear – we strongly discourage gifting as an estate planning tool! People often come to us and say they want to, for example, give away some of their assets now to avoid inheritance tax when they die. NO, NO, NO!! (See #1, below.)
Still, grandparents often want to help out their grandchildren, not as a planning strategy, but out of love and affection. The grandparents have achieved financial security, and want to share that with their grandchildren for many purposes, such as summer camp, college tuition, wedding costs, the down-payment on a first home, they don't want their children and grandchildren to have to wait for an inheritance.
However, helping out family members raises a number of legal issues involving eligibility for public benefits and questions of fairness among family members. Here are six issues grandparents should consider before making gifts to grandchildren. (To be clear, these issues apply to anyone making gifts, not just grandparents.)
- Beware the Medicaid penalty. Grandparents need to be aware that if either of them needs skilled nursing level of care, either in a nursing or their own home, and they apply for Medicaid to pay for that care within five years of making the gift, then they will be ineligible for Medicaid benefits for some period of time, which will depend on the amount of the gifts.
- Is it really a gift? Does the grandparent expect anything in return, for example that the funds be repaid or that the money is an advance on the grandchild's eventual inheritance? If yes, this should be made clear, in writing, whether in an informal written agreement, a promissory note (if a loan), or the grandparent’s Will.
- Is everyone being treated equally? Not all grandchildren have the same financial needs, and grandparents don't feel equally close to all of their grandchildren. Although it's the grandparent's money and she can do what she wants with it, if she's not treating all of her grandchildren equally, she needs to consider whether unequal generosity will create resentment within the family. Many people may help out some children and grandchildren more than others based on need, with the expectation that this will be kept private.
- 529 plans. Many grandparents want to help pay higher education tuition for grandchildren. But not all grandchildren are the same age, making it difficult to make sure that they all receive the same assistance. A great solution is to fund 529 accounts for each grandchild. These are special accounts that grow tax deferred, with the income and growth never taxed as long as the funds are used for higher education expenses.
- Don't be too generous. Grandparents need to make sure that they keep enough money to pay for their own needs. Too many gifts can quickly deplete a lifetime of scrimping and saving. It won't do the family much good if a grandparent is just scraping by because he's done too much to support his children or grandchildren.
- Beware taxable gifts. As there is no gift tax for the first $11.4 million (in 2019) each of us gives away, this isn’t a concern for most of us. Also, there's no limit or reporting requirement for payments made directly to medical and educational institutions for health care expenses and tuition for others.
There are other issues to consider based on specific family situations. Some grandchildren shouldn't receive gifts because they have addictions, or the gifts may undermine the parents' authority or plans for the grandchild. Communication with the middle generation is key to making certain that gifts achieve the best results for all concerned.
If you simply must those gifts, first talk to an elder law attorney about devising the best plan for you and for your grandchildren. We can help. Just fill out this simple online form and we'll be in touch to get you the answers you need.