Question: Gifting assets to your grandchildren can do more than help your descendants get a good start in life; it can also reduce the size of your estate and the tax that will be due upon your death.

Answer: Gifting assets to your grandchildren can do more than help your descendants get a good start in life; it can also reduce the size of your estate and the tax that will be due upon your death.

Perhaps the simplest approach to gifting is to give the grandchild an outright gift. You may give each grandchild up to $14,000 a year (in 2014) without having to report the gifts. The problem with an outright gift is that you have no way of making sure the money is spent the way you would want it spent.

The following are some other ways you can give to grandchildren:

  • You can pay for educational and medical costs for your grandchildren. There’s no limit on these gifts, meaning that you can pay these expenses in addition to making annual $14,000 (in 2014) gifts. But you have to be sure to pay the school or medical provider directly.
  • You can make gifts to a custodial account that parents can establish for a minor child.
  • You can transfer money into a trust established to benefit a grandchild.
  • You can reduce your taxable estate while earmarking funds for the higher education of a grandchild through the use of a “529 account.”
  • You can use other gift vehicles like IRAs and savings bonds.

For details on these gift vehicles, click here.

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