What can you do to provide for grandchildren fairly and sufficiently? Here are four tools to make use of.

1. Direct Gifts

Taxpayers who give money directly to other individuals fall subject to the gift tax even if they're not always aware of it.

Fortunately, the IRS allows an exemption to the gift tax that allows each taxpayer (and each spouse) to give up to $15,000 annually (as of 2019) to any individual. That means you and your spouse together can gift $30,000 per year to grandchildren without incurring any tax liability - whether or not you file together.

Directly gifting money to adult grandchildren is an excellent way to help them out over the long term and to see them benefit from your gifts. It also helps keep your overall estate under the potential estate tax threshold should you pass away.

2. Educational and Medical Expenses

Another exemption to the annual gift-giving limits is to directly pay certain types of expenses for the grandchild. You are allowed to directly pay tuition or medical bills to the institution or provider (not to the grandchild or their parent) without affecting any gift tax exemptions. And there is generally no dollar limit over your or their lifetime.

Some grandparents use this exemption in conjunction with the annual gift tax exemption to make the most of their dollars. You could pay college tuition directly to the school, for instance, and then give the student $15,000 (or $30,000 for spouses) for living expenses and books while they're at school.

3. Trusts

Trusts are increasing in popularity for a variety of reasons. First, they are a way to give money to minors, who legally cannot inherit money until they reach the age of majority. If you have young grandchildren, this is an excellent way to care for their needs as they grow. It's also an excellent choice if you feel that the grandchildren's parents may not be the best choice to handle the child's money.

Secondly, trusts avoid the delays and complications of the probate process when you pass away. That makes them easier and more immediate ways to set aside money necessary for the care of smaller children and any grandchildren who have special, ongoing needs.

4. Lifetime Exclusion

In addition to the annual gift tax exemption, each taxpayer also has granted to them a lifetime exclusion. In 2019, this exclusion is $11.4 million and includes all the gifts you've excluded over the course of your lifetime. You must file a form with the IRS that designates gifts as counting toward this exclusion when you make them.

To properly use the tax exclusion, you will need to create a strategy for using your lifetime amount where it will do the most good. If you have appreciating assets (such as stocks or houses), designating them toward the lifetime exclusion could prevent heirs from getting stuck with a much larger tax bill down the road.

What types of gifting tools are right for your family situation? It depends on many factors, including ages and personalities as well as your own goals. At Bliss & Skeen CPAs, we specialize in estate planning in all its forms. Make an appointment today to start designing the right plan to care for your grandchildren so you can rest easy and enjoy their company.