From Guardianships to Gift Trusts; Some Tips for Grandparents

From Guardianships to Gift Trusts; Some Tips for Grandparents

This article high lights the benefits of Gaurdianships and gift trusts. McDowall Cotter, APC is a law firm located in San Mateo County,  California.

We live in tough economic times.  As a result of these times and other factors, including a desire to maintain the family unit, many grandparents are involved with the care of their grandchildren.  A grandparent’s participation can vary from a full-time ‘parent’ to a part-time after school overseer.  Often times, participation takes the form of financial assistance.  This article explores some of the tools available to maximize the support grandparents may provide to their grandchildren.

A Guardianship is a powerful tool for a grandparent serving as a full time parent. In functional family settings, grandparents need to maintain a relationship with the parents in order to have access to the grandchildren.  When families are not intact, Guardianship may be the best answer for a grandparent.  Guardianship provides the legal authority for a grandparent when enrolling the grandchildren in school or seeking healthcare for the grandchild.

A guardianship can be established by a person unrelated to the grandchild, but a significant bond and relationship is required.  Grandparents often have that bond with their grandchildren.  Guardianships are established through court order, giving the guardianship the force of law.  The terms of the guardianship can be changed only by agreement of the parties or by court order.

Financial support from grandparents is a welcome gift if the grandparents have sufficient financial resources.  Experience shows that grandparents would prefer to direct gifts for a specific purpose, and that purpose is most often the education of their grandchildren.  There are several gifting methods available to grandparents.  Some of the more common ones are explored here.

$13,000 is the ‘annual exclusion amount’ for gifts made in 2010.  This is the amount that may be given by an individual to another individual without any tax reporting requirements.  The drawback is that the gift is usually of cash without directive as to how the gift is to be used.

Direct payment to a school for tuition or to a health care provider for medical expenses can be made in addition to a gift of the annual exclusion amount.  Thus, a grandparent may pay the cost of tuition and/or the cost of medical treatment.  The grandparent must make payment of the tuition directly to the school or make payment of the health care expense directly to the provider in order to exceed the $13,000 annual exclusion amount.  Such payments are in addition to, and not in place of, the $13,000 annual exclusion amount.

529 Plans offer a way to see that gifted funds are likely to be used for education.  While contributions to 529 plans are limited to the $13,000 annual exclusion amount (the plans may be front loaded with 5 years worth  of the annual exclusion amount; currently $65,000) the funds remain in an IRA- like environment, growing tax free until withdrawal.  Funds are to be used for college education expenses.  When withdrawn, income on the investments in the plan is subject to income tax.   Since the taxpayer will be the grandchild attending college, the tax rate assumedly will be lower.  You should consult your financial planner, your bank or your brokerage firm to learn more about this strategy.

A Gift Trust established for the benefit of a grandchild is also an effective gifting strategy.  The grandparent can specify how the trustee is to distribute funds and the trustee can be a family member, including one or both of the grandchild’s parents.  There are a few hoops to go through with this planning and you should speak with your attorney to learn more about this strategy.

Generation Skipping Tax planning is sophisticated and is best done with an attorney.  While there is no estate tax this year (2010) it is likely to return in one form or another in 2011. Indeed the estate tax is currently scheduled to return in 2011 when the amount a decedent can pass on to his/her heirs free of estate tax will be limited to $1,000,000 and estate tax rates are scheduled to reach 55% for larger estates.  If grandparents could leave their estates to their grandchildren, an estate tax on that amount could be avoided when the middle generation died.  This strategy was used by some wealthy individuals who left their estates to their grandchildren while providing income to their children.  The IRS soon realized that by skipping a generation, the wealthy families were essentially deferring the tax on the estate almost 40 years, the approximate length of a generation.  Thus, congress imposed a ‘generation skipping tax’ which places a penalty tax on distributions to grandchildren when the amount is greater than a limit set by the congress.  Barring a change in the tax laws, starting in 2011, a generation skipping transfer tax will be imposed on amounts over $1 million which is to be distributed to a grandchild.  The rules around the generation skipping transfer tax are complex.  Nonetheless, grandparents with substantial wealth will want to consider use of generation skipping strategies as part of their estate plans so as to minimize the estate tax hit in future years.

In summary, the level of involvement grandparents are likely to enjoy with their grandchildren will be determined in large part by the grandparents’ relationship with their children.  In families where the grandparents’ support of the grandchildren is needed on a fulltime basis, a legal guardianship should be considered.  When financial support is under consideration, the tools identified above are available to grandparents willing and able to provide such support.

If you want to learn more on Guardianships and Gift Trusts contact us at:

2070 Pioneer Court
San Mateo, CA 94403
Tel 650-572-7933
Fax 650-572-0834

McDowall Cotter provides comprehensive legal services in three areas of practice: civil litigation; business; and wealth preservation. To learn more visit us at We are a San Mateo based law firm and for more than 50 years, McDowall Cotter’s chief objective has been to deliver exemplary legal services that are personalized, effective and efficient.