A 529 account can help avoid the Generation-Skipping Transfer (GST) tax
Grandparents need to keep the federal generation-skipping transfer (GST) tax in mind when contributing to a grandchild's 529 account. The tax in its current form was introduced in 1986 to prevent wealthy grandparents from avoiding taxation by “skipping” their own children and leaving inheritance directly to their grandchildren. The GST tax is levied on transfers made during your life and at your death to someone who is more than one generation below you–any beneficiary who is at least 37 ½ years younger than the donor–such as a grandchild.
Again, this topic is for those who might surpass the current $15 million per person estate lifetime exclusion limit, not a common problem. Please consult with estate, tax, and financial professionals for a specific situation.
To help avoid the GST tax, consider:
Utilizing the 5-year accelerated gifting rule for 529 plans. As stated, up to $95,000 per donor ($190,000 per couple) per beneficiary can be given at one time, then averaged over a 5 year period.
Gifting as much as possible to your children as well. They can then transfer funds to the next generation without the GST tax concerns.
Transferring ownership of grandchild 529 accounts to your children.
Paying for a grandchild’s tuition directly to any qualified educational institution, though paying the school directly could reduce the student’s eligibility for need-based financial aid (not usually the problem in this situation).
Cambry is wealthy and wants to gift to her grandkids. After gifting the maximum $95,000 each to the grandkids, she also superfunds an account for her daughter, Heather. Over time, Heather makes transfers to her children, the grandkids, avoiding any appearance of generation-skipping and GST tax.
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.