by Mark A. Krohn, Partner
Jacobowitz & Gubits, LLP

Gary wants to make a $25,000.00 gift to each of his four (4) grandchildren. Are the gifts Gary plans to make taxable? The answer is “Yes.” The Federal law requires that Gary report his gifts on Form 709, United States Gift (and Generation Skipping Transfer) Tax Return, on or before April 15th of the year following that year in which the gifts were made. The so-called “Generation Skipping Tax” applies to gifts made by grandparents to grandchildren in any year the donor’s children are alive (hence, the name generation skipping). However, if the gift is made to a grandchild subsequent to the death of the donor’s child, then the gift is no longer considered taxable. Most people will not be subject to this tax since there currently exists a $1.5 Million exemption for Generation Skipping Tax purposes. Thus, grandparents can make generation skipping transfers up to that amount without paying any tax. Once the exemption is used up, however, the tax rate is 47%. What this means is a person will pay $47.00 in tax for every $100.00 gifted to a grandchild. Ouch!

Can’t you make an gift in some amount without being taxed? The answer is “Yes.” You can subtract the $11,000. annual gift tax exclusion when determining your taxable gift. For most people this technique works well. Further, if a spouse joins in making the gift up to $22,000. can be gifted to each donor without triggering a taxable gift.

How about gifting up to $11,000. a year to each of your grandchildren for the purpose of funding the premium due on life insurance (owned by the grandchildren) on your life? This technique works well where the grandparent is in good health. Additionally, at death the insurance proceeds will not be subject to federal estate tax or the generation-skipping transfer tax. If the insurance policy is to be held in trust, however, care must be taken to ensure that transfers to the trust qualify for the annual exclusion and that the insured correctly allocates part of his or her $1.5 Million exemption, if needed, to each transfer.

What about a gift of a life insurance policy itself (versus funding the premiums on a policy purchased by someone else)? The life insurance policy will be valued at the “interpolated terminal reserve”, which is basically the cash surrender value. The insurance company will notify you and the IRS of the amount when you request a transfer of ownership. If the value is less than $11,000.00 no gift tax will be due. Giving away your policy can get the proceeds out of your estate and beyond the reach of creditors. Gifts to a grandchild under a 529 College Savings Plan. Another technique available to grandparents would be to make annual gifts into a grandchild pursuant to a NY 529 College Savings Program. Under the Program, New York grandparents can deduct up to $5,000 on their state income tax return each year for contributions made to benefit a grandchild. The account can be used to pay for tuition, fees, books, room and board, and supplies at any eligible postsecondary school in the United States and abroad. To learn more about New York’s 529 College Savings Program call 1-877-697-2837.