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Jewish World Review Feb. 14, 2005 / 5 Adar I, 5765
Jan L. Warner & Jan Collins
Ensuring gifts to grandkids are used for college
http://www.NewsAndOpinion.com |
Q: My only son and his wife are struggling financially since he was laid
off. The two of them are using credit cards until they get back on their
feet. Over the years, my wife and I have given our son nearly $30,000 to
put away for the education of our two grandchildren, who are now 14 and
16. He recently admitted to me that he had to use this money just to
keep his family afloat, particularly after his wife also lost her job.
We feel that he has betrayed our trust by using the money earmarked for
our grandchildren, but my wife and I don't want to say anything, given
his desperate financial situation. Unfortunately, we don't feel we can
trust him now. (We had given the money directly to our son because we
didn't want to make gifts directly to our grandchildren that might be
used for non-educational purposes, once they become of age. Also, we
didn't want to go to the expense of getting a lawyer to draw up a trust,
and didn't want the ongoing expenses of overseeing a trust.)
Now we are considering making gifts to a custodial account for each of
our grandchildren because we believe our options are limited. Are we
correct?
A: Since hiring a knowledgeable lawyer to prepare an appropriate trust
would have been less expensive than the $30,000 your grandchildren won't
get to use, we believe your concerns about using a lawyer are severely
overstated and your options more expansive.
Let's consider the pros and cons of making gifts under either the
Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act
(UTMA), depending on the law of the state in which you live.
If you and your wife make gifts to accounts for your grandchildren under
the terms of either of these laws, you'll be making irrevocable
transfers of your assets. While these accounts are easy to open, each of
your grandchildren will have complete and unfettered access and control
of his/her account on the date he/she attains the age of majority
between 18 and 21, depending on the law in your state of residence. And
there are no restrictions on the use of these funds. Still, in some
instances, shifting income tax liability to children is a benefit of
these types of accounts because the income is taxable to the minor.
Because of the inflexibility of UGMA and UTMA accounts, the Internal
Revenue Code was amended to include Section 529, which authorizes
qualified state tuition programs or "College Savings Plans" that are
specifically designated for educational purposes. Like UGMA/UTMA
accounts and, for that matter, like outright gifts, you and your wife
can each give $11,000 per grandchild ($22,000 annually to each, if you
wish) without being required to file gift-tax returns.
The qualified state tuition programs for chosen beneficiaries help
offset the future cost of higher education and, for some, provide tax
benefits. For example, in some state plans, contributions are deductible
for state income purposes, and in all qualified plans, future
distributions to designated beneficiaries are free of income tax if used
for qualified higher-education expenses.
Some state plans will allow custodial accounts to be transferred into
the Section 529 plan. Contributions must be in cash, not securities, and
if your grandchildren don't go to college, or you wish to take your
money back for any reason, you will can get it back and pay taxes and a
10 percent penalty on earnings.
And then there are the other kinds of trusts you are trying to avoid.
Too multifaceted for inclusion in this column, we believe that properly
prepared trusts may be a viable option.
Please do yourselves a favor and consult a knowledgeable attorney and/or financial planner who can tell you about all of your options. You have made a $30,000 mistake, and this is a lot of money. Don't make another one. Find this column helpful? Why not sign-up for the daily JWR update. It's free. Just click here.
JAN L. WARNER received his A.B. and J.D. degrees from the University of South Carolina and earned a Master of Legal Letters (L.L.M.) in Taxation from the Emory University School of Law in Atlanta, Georgia. He is a frequent lecturer at legal education and public information programs throughout the United States. His articles have been published in national and state legal publications. Jan Collins began co-authoring Flying SoloŽ in 1989. She has more than 27 years of experience as a journalist, writer, and editor. To comment or ask a question, please click here.
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