A question that often comes up in discussions with clients about their estate plan is Ahow should I provide for my grandchildren?@. Sometimes this is in the context of gifts during lifetime.  At other times it is the question of what provisions should be included for grandchildren in trusts or wills.  Let=s take these one at a time. 

Lifetime Gifts.  Clients are accustomed to helping grandchildren with lifetime gifts.  Most seem to realize that they can give up to $12,000 to each grandchild, using the annual gift tax exclusion.  (This doubles to $24,000 per year for married grandparents.)  Sometimes these are in the form of gifts of cash or stock.  But what about small children, even pre-schoolers?  There are several mechanisms in the Internal Revenue Code and Michigan law for expediting gifts to minors.  Some of the favorites are: 

1.  UTMA Accounts.  Michigan recently adopted the Uniform Transfers to Minors Act.   Basically, under UTMA, a custodian holds title to the funds for the benefit of the minor.  The custodian can use the funds for the minor=s expenses, medical or educational.  Delivery of any remaining funds can be made from age 18 to 21, as specified by the donor.  There are potential estate tax problems if the grandparent is the custodian.  Income taxes can be a nuisance since the minor=s social security number is used on the account.  Depending on the amounts, the minor might have to file income tax returns.  Another negative is the possibility of a parent custodian using the funds for the parent=s own purposes. 

2.  Medical Expenses.  The IRC has specific gift tax exemptions for direct payment of medical expenses for the minor.  These payments can be made over and above the annual exclusion and should be made directly to the medical care provider, not to the minor or a parent. 

3.  Tuition Payments.  The IRC also has specific exemptions for direct payments of tuition by grandparents.  Again, these payments should go directly to the school, and can include tuition for preschool, elementary school and high school.  These payments also can be excess of the annual gift tax exclusion.  

4.  Section 529 Plans.   Probably the most tax advantaged method of providing for grandchildren is through a state sponsored Section 529 Plan.  Grandparents can fund up to five years of annual exclusion gifts in advance.  That is $60,000 per grandparent, or $120,000 for a married couple=s gifts to each grandchild.  In large families with significant wealth, this can be an important tax saver for young grandchildren or great grandchildren.