Gift Taxes: ABLE Accounts vs SNTs
Family members often want to make small gifts to grandchildren or other relatives; a gift under $15,000 (for 2021) usually falls within the “annual exclusion” amount, which allows completed gifts of up to $15,000 without having to report the gifts to the IRS or reduce the giver’s estate tax exemption. A gift made directly to a disabled grandchild could interfere with that person’s public benefits, so it could be tempting to make the gift instead to the disabled grandchild’s Third Party Special Needs Trust. But this is cumbersome and not ideal, for several reasons: (1) the annual exclusion does not apply to a gift made to a properly-drafted Third Party SNT, as it is not a “completed” gift; (2) the giver must report the gift to the IRS on a Form 709 (gift tax return), and that gift reduces the giver’s estate tax exemption dollar-for-dollar; (3) the trustee of the SNT needs to obtain a Tax ID number for the SNT, and file yearly income tax returns for the SNT.
To avoid these pitfalls, we suggest that gifts of up to $15,000 be made to the disabled grandchild’s ABLE account. This account is considered the individual’s “own” money, so the gift is a “completed” gift and thus qualifies for the annual gift exclusion. No Form 709 needed, no Tax ID number needed, no income tax returns needed. This is win-win!!