Maroney Law Blog

Tuesday, December 16, 2014

Passing Wealth to Your Grandchildren without Tax Penalties

Many grandparents want to pass their wealth to their children or grandchildren while they, the grandparents, are still living. Gifts to your loved ones can be a good way to reduce a taxable estate. Currently, the law (2014) allows you to give a child or grandchild $14,000 a year without paying a tax on the gift. Note that this exemption applies only to gifts made during the lifetime of the individual who is doing the gifting.  However, one major consideration is whether or not the child is mature enough to handle the acquisition of a large amount of money.

A "Crummey" trust provides a way to take advantage of the gift tax exclusion while keeping the money in a trust until the child is old enough to handle it.

The benefit of putting money for a child into a trust is that you retain control over the time and amount the child will receive. Simply putting money into a regular trust will generally not prevent the gift from being taxed. In order to avoid the gift tax, the child must have a "present interest" in the money. This means that child must be able to access the money the instant the trust is created. As such, a promise to give a child money at a certain point in their life, i.e. when the child “matures,” does not count as a present interest. Thus, most gifts to trusts are not excluded from the gift tax.

The Crummey trust is designed to allow you to put money into a trust and receive a gift tax exclusion. Essentially, the Crummey trust includes a provision that gives the beneficiary (the child or grandchild in our scenario) a certain amount of time to withdraw money before it is transferred into a trust. After the designated amount of time has passed, the beneficiary can no longer access the funds and it becomes subject to your trust designations. When establishing a Crummey trust, it is very important that the creator of the trust notifies the beneficiary of the gift as well as his or her right to withdraw the gift.

If this notice is not given, it is very likely that the IRS will tax the gift. Given the existence of the temporary present interest, there is the risk that the beneficiary will withdraw the money right away. However, once the temporary time period has expired, the gift will be a part of the trust, you control how much the beneficiary can receive and when.

For more information about end-of-life asset management, or further information regarding Crummey trusts, please contact the experienced elder law and estate planning attorneys at Maroney Associates, PLLC.  Call us today at 866-994-2025.  

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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