What are the Tax Rules of Gifts to Grandchildren?

All grandparents want the best for their children and grandchildren and many take the initiative to set aside part of an estate to help future generations get a head start in life. Forward thinking grandparents should also be aware there are certain tax and entitlement benefits rules seniors need to follow to remain in compliance with the law in order to avoid jeopardizing many of their own assets.


First, grandparents need to know the Internal Revenue System (IRS) places a $14,000 limit on untaxable gifts each year to individual grandchildren. Married couples may each give up to $14,000 to each and every grandchildren without any taxes, making the total $28,000 per year. Grandchildren receiving these gifts will not have to pay any income tax of these gifts, unless the assets generate income.


Additionally, grandparents can make direct payments to doctors and educational institutions to cover services on behalf of their grandchildren. The IRS does not consider payments for medical treatment and education as gifts subject to tax and grandparents can still give up to $14,000 each per year to their grandchildren without worrying about gift taxes.


How do I make sure my grandchildren use their gifts appropriately?


Minor grandchildren, and even some adult grandchildren, may need the help of their parents to properly manage gifts from grandparents. There are a number of different ways grandparents can gift assets and ensure proper use with parental supervision.


Cash gifts can be deposited to custodial accounts set up by parents on the grandchild’s behalf. With this method parents can track deposits and withdrawals, transfer monies to separate checking or savings accounts, and teach young people about financial responsibility.


Alternative methods include establishing a trust, creating an IRA, or purchasing savings bonds which will mature after the grandchild comes of age. Often times, establishing trusts or other gift vehicles is a very prudent way to disburse assets to adult beneficiaries as well as these moves can avoid probate court and other time consuming actions.


Other considerations for gifting assets to grandchildren


One of the most important considerations seniors need to be aware of when it comes to gifting assets to grandchildren is how these asset transfers can affect standing with Medicaid. Under state and federal laws, there are certain financial penalties for “spending down” assets prior to applying for Medicaid.


These “look back” laws are intended to ensure seniors simply to do not give away all their assets to qualify for government assistance. The look back periods and penalties vary from state to state and seniors are encouraged to consult with an experienced attorney to properly determine their eligibility under the law.

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