Dear Liza: I read in your blog about the annual $13K gifting free from reporting and not being included as part of the lifetime million dollar gift credit. For my grandchildren, can I 'gift' that annual $13K to a revocable trust for their education?
Dear Liza: I read in your blog about the annual $13K gifting free from reporting and not being included as part of the lifetime million dollar gift credit. For my grandchildren, can I 'gift' that annual $13K to a revocable trust for their education?Yes, sort of. This is a slightly long answer because 2010 is an odd year. But stick with me. Gifts to your grandchildren are what's considered a generation-skipping transfer. That means they go from you directly to your grandkids, skipping the parent generation in between. When you skip a generation, the IRS levies a new tax, called the "generation-skipping transfer tax (GSTT)" which is equal to the highest level of estate tax (scheduled to be 55% in 2011). Why? Well, the IRS figures that if you'd given the money to your children (their parents) first, they would have been able to tax that money when it went from parent to child when the parent dies. So, rather than lose their bite of the apple, they subject GST gifts to an extra, heavy, tax. But wait, it's going to be OK. Except for 2010, which has it's own weird rules (the GST tax is repealed, but just for this year, unless Congress acts to change that before Dec. 31. Sigh.), there's an annual exclusion from the GST tax also that's equal to the annual gift tax exclusion. So, usually you can make $13K annual gifts to your grandkids without having to pay extra GST tax. But not a gift to revocable trust. It has to be an outright gift, or one to a trust that you have no control over (an irrevocable trust). A gift to the grand kids in a custodial account or a gift to a 529 College Savings Plan account for your grandkids would work.
Usually a gift to a trust that's irrevocable (most education trusts are) would work, except not this year. Since the GSTT is scheduled to come back in 2011, gifts made in 2010 may not be exempt for that tax for money paid out of trusts in future years, so, for this year, I wouldn't make a gift in a trust--since it may be subject to tax when the money is paid out to the kids in some future year, we just don't know yet. You can also make DIRECT payments of tuition for your grandkids, and these are also excluded from the GST and gift tax. Here's a heplful article that summarizes your options--scroll down past the first entry to get to a helpful gifting summary.