Think back to when you were a struggling adult taking your first job. Maybe you had a big college loan to pay off, but you were willing to work hard. Maybe there were diapers to buy and just enough change in your pocket to buy a few gallons of gasoline for your Chevy.
Today, you may be well off financially after a lifetime of hard work and a good deal of pluck and luck. But, some of those memories probably help you sympathize with your grandchildren. With the higher costs of college today and a very competitive job market, they may find the going rough when they step out into the world. So, now you may want to help them financially.
If so, you may have had your radar out for tax-wise ways to do so. Tax-wise because you`re concerned about gift and estate taxes that may be due if you give away too many assets to someone else. The federal estate tax, for example, is a tax on property transferred at death. Depending on the size of the estate, the tax can substantially diminish an inheritance. (No tax applies to individual estates at under $625,000 in 1998.)
Giving away assets as gifts to your grandchildren during your lifetime doesn`t necessarily reduce assets in an estate because a single, unified tax applies to an estate plus any lifetime gifts made after 1976. There is an exemption for making financial gifts, however. You can give away up to $10,000 every year to any number of recipients – a way to avoid a gift tax and also to save on future estate taxes by reducing the assets left in your estate. Married couples can make that gift $20,000 to each person annually. The $10,000 amount will be indexed for inflation in the future.
You may have heard, too, of a financial concept called the generation-skipping transfer of assets. Generally speaking, there`s an IRS exemption that allows a total of $1 million in assets to pass to a grandchild or great-grandchild ($2 million for a married couple) during the grandparents` lifetime or at death. The $1 million amount will be indexed for inflation after 1998. This is a way to keep assets within a family and to lower the number of times those assets are taxed through gift or estate taxes. That`s because the grandparents` assets “skip over” their own children`s taxable estates and go right to the grandchildren. So, even though the money would be included in a grandparent`s taxable estate, it would not be subject to estate taxes again when the parents die.
Generation-skipping transfers are complex and must be done carefully and with the advice of a competent tax advisor, because any gifts that amount to more than that $1 million exemption are subject to the Generation Skipping Transfer Tax (GSTT) in addition to any federal gift or estate tax. The GSTT is something to be avoided, since it`s a tax that can be as much or more than the original estate taxes would have been.
Incidentally, there`s no GSTT or gift tax for gifts to grandchildren that are payments for medical expenses and/or college tuition if the check is made directly to those institutions.
With American families living longer, there may be several generations within one family today. Passing along an inheritance to a future generation in your family may require a little homework right now, but it can be a way for you to give someone you love more than your happy memories.
Gary N. Garner is a personal financial advisor with American Express Financial Advisors in Jackson.