You may want to start helping your grandchildren out with college, medical, and housing expenses sooner rather than later. But be aware of tax traps that may wait. There are simple ways to give your grandkids a head start, without incurring taxes:
- Give cash. The gift tax and the generation-skipping tax allow you to give $13,000 in cash or other gifts in 2012 to each of your grandchildren before getting taxed. If you are married, you and your spouse can give $26,000 to as many family members as you like.
- Use a 529 plan to pay for college. Set up a Section 529 education savings plan for each of your grandchildren. Earnings in a 529 account are exempt from federal tax, provided the money is withdrawn to pay for tuition or certain expenses for college or graduate school.
- Help with medical and college expenses directly. You can pay for the tuition, dental, and medical expenses of anyone you want, as long as you make the payments directly to the providers of those services. That means you can't reimburse the people you are helping.
- Lend your grandchild money to buy a house, a car, or start a business. Avoid potential gift and income taxes by charging a minimum rate of interest set each month. This rate, set by the Treasury, is called the applicable federal rate.
- Make your grandchild part owner of a house. This will avoid the controversy about whether or not allowing someone to live rent-free in a house you own is a gift. Make the occupant part owner either through a gift or a sale, which means no rent is required. Ensure that each owner has an interest of at least 25% to 50%.
Published January 11, 2010