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Tax Planning Advice for Grandparents Day

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August 18, 2014

In case you haven’t heard, National Grandparents Day is just around the corner, on September 7.

Fred Slater, CPA and Ellen Minkow, CPA, a pair of tax and financial advisors at MS 1040 LLC in New York City, have two children each and no grandchildren yet (though they reportedly are still hoping). They have some advice on how grandparents should talk about money with their children and grandchildren.  

“Grandparents should strengthen the financial responsibility message given by parents to help grandchildren build healthy fiscal habits,” said Slater.

He proposes the grandparent make a contribution to a Roth IRA, a savings account or a 529 plan for the grandchild, or help in the purchase of a car. 

“A grandparent can now give as much as $14,000 a year tax-free to each child and grandchild,” said Slater. 

Minkow suggests building healthy financial habits with an alternative to direct giving. “Funding one or more types of trusts can be customized to fit many financial and personal situations,” she said. “An incentive trust, for example, could be instructed to distribute funds to your grandchildren in installments, at specified points in their lives, and may tie payouts to your grandchild’s accomplishments—reaching a certain income level, for example, or getting a college or graduate degree.”

Fred Slater

Other possible financial moves for grandparents include taking care of college by setting up a state-sponsored 529 college savings plan for a grandchild. “Start early and kick in the annual gift-tax-free maximum, and your grandson or granddaughter should be in fine shape when tuition comes due,” said Minkow. 

Money in 529 plans grows tax-free and withdrawals for qualified college expenses aren’t taxed, either, they pointed out. Grandparents who want to accelerate giving can make five years’ worth of gifts—up to a maximum of $70,000—all at once. Because they control the plan, they don’t have to worry about a spendthrift scion squandering the money.

“If you didn’t get around to starting a 529,” Minkow added. “Consider sending a tuition check directly to your grandchild’s college. It won’t count against your $14,000 annual gift-tax exemption!”

“You can cut your tax bill by up to $2,500 per student if you’re paying tuition for the first four years of college (grad school doesn’t count),” said Slater. “To qualify for the full credit, you must spend at least $4,000 in tuition and qualified expenses (including fees, books and related course materials), and your modified adjusted gross income must be below $160,000 if married filing jointly or $80,000 if single or head of household (a partial credit is available for couples with income of up to $180,000 or singles and heads of household earning up to $90,000.) The student must be considered your dependent to qualify for the credit—so it generally applies only to parents.”

Ellen Minkow

Minkow has long contributed to philanthropic projects, particularly in the arts, and discussed ways for grandparents and grandchildren to deal with charitable giving. “There are several options for helping your grandchildren learn the value of charitable giving, and many of these vehicles also offer estate tax advantages,” she said. “For example, you could transfer assets from your estate into your own family foundation, though to be effective, a family foundation needs an initial commitment of as much as $1 million. Your grandchildren could get involved by helping screen grant applications or serving on the foundation’s board. A less expensive alternative is a donor-advised fund, which also lets grandparents and grandchildren confer about what charities to support.”

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