As America ages and the American family structure become more complex and diversified, grandparents are taking on increasingly active roles in providing for their grandchildren. The law does not specifically enumerate a set of grandparent rights. Yet, with the growth of elder law advocacy, the number of ways in which senior citizens can provide for their grandchildren is growing.

1. GIFTS AND TRANSFERS

Inter vivos gifts and transfers are major estate planning tools because they may lead to both income and estate tax savings. While a gift is defined to include an outright transfer, it can also be defined to encompass debt forgiveness, foregone interest on an intra-family loan, the assignment of insurance policy benefits, or the transfer of a property to a trust. Through gift giving, an individual can remove some property value appreciation from his estate.

1.1 Annual Exclusion Gift.
The annual gift tax exclusion permits each donor to make tax-free gifts up to $10,000 per person per year. I.R.C. ? 2503(b). Therefore, a married couple may gift up to $20,000 per person per year without gift tax consequences. However, if a grandparent makes a direct gift in excess of the annual exclusion amount, that gift may be subject to tax. A gift paid to an educational organization on behalf of a grandchild for that grandchild's tuition or a gift for medical expenses paid to a medical care provider would not be subject to the gift tax. I.R.C. ? 2503(e).

1.2. Gifts in Trust.
When a grandparent distributes a portion of his or her assets to a grandchild, financial as well as emotional benefits are often realized. Through a will or trust, a grandparent can dictate exactly what personal property to distribute to his or her grandchild. With a single bequest in a will, an individual can remember and provide for a grandchild.

Certain trusts are specifically designed to make gifts to grandchildren. By using a properly constructed trust, a grandparent can not only transfer assets to a grandchild, but also avoid incurring a gift tax.

1.2.1. Section 2503(c) Trusts. Internal Revenue Code Section 2503(c) sets forth the parameters for a generation skipping trust with distributions free from gift tax. The section provides that a gift to an individual who is not yet age 21 will be eligible for the exclusion if the gift meets these requirements:

1. The trustee must have the power to expend the gift property and the income there from to or for the benefit of the minor before he reaches age 21.

2. The minor must have the right to receive the unexpended property and income at age 21.

3. If the minor dies before age 21, the principal and income must be paid to the minor's estate or to persons he chooses pursuant to a general power of appointment.

Also, to qualify for the exclusion as a Section 2503(c) trust, the trust instrument must not substantially restrict the exercise of the trustee's discretion to make distributions.

Although the I.R.C. provides that the trust terminates when the beneficiary reaches 21, the trust may continue beyond that age if the instrument:

1. grants the minor, no later than age 21, at least a 90-day window in which to withdraw the assets of the trust; and

2. requires that the minor be notified of this right

Section 2503(c) trusts are especially advantageous when:

(a) The grantor's income tax bracket is high and the donee's income tax bracket is relatively low.

(b) The grantor owns an asset which is likely to appreciate substantially over a period of time but does not want the appreciation to be included in his gross estate.

(c) The grantor wishes to use the gift tax annual exclusion.

1.2.2. Section 2503(b) Trusts. Grandparents are provided with another means by which to make a gift to a minor in trust which qualifies for the annual gift tax exclusion under the Code. To qualify for the exclusion, under section 2503(b), the trust must be irrevocable and, in contrast to the 2503(c) trust, all of the income must be paid to the minor from the outset. Distribution of income to the beneficiary on an annual or more frequent basis is mandatory to receive the tax benefits. Unlike a 2503(c) trust or a custodianship account, distribution of principal and unexpended income is not required by age 21. In fact, the principal does not ever have to be paid to the income beneficiary.

Unlike many other tax benefit arrangements, a ? 2503(b) trust can last as long as the beneficiary's lifetime.

For tax purposes, gifts under ? 2503(c) are assigned actuarial values. Grandparents who choose to make their gift under this section should make the income payable to the minor's parents to be expended for the minor's benefit. Alternatively, grandparents may make the income payable to a custodial account for the minor.

For gift tax purposes, the entire amount placed into the trust is treated as a gift divided into an income portion and a principal, or remainder, portion. The income portion qualifies for the $10,000 annual exclusion while the balance does not.

1.2.3. "Crummey" Trusts. A third trust alternative for grandparents is a discretionary or "Crummey" trust (named from a 1968 9th Circuit case). Here, the grandparent gives the trustee discretion to distribute or accumulate income while giving the minor beneficiary the power to withdraw the property transferred to the trust for a reasonable period of time after the gift is made. Gifts to the trust qualify for the annual gift tax exclusion. By law, the grantor grandparent is required to notify the minor of his power of withdrawal and to allow the minor reasonable time to exercise this power. E.g. Albright v. U.S., 308 F.2d 739 (5th Cir. 1962).

If the minor does not exercise the power of withdrawal in a given year, the minor himself is deemed to be making a gift to the remainderman of the trust (if one has been named). This is not the case, however, where the minor is given the power to take for himself no more than the greater of $5,000 or 5% of the trust corpus. I.R.C. ? 2514(e).

By using a Crummey trust, a grandparent can grant a grandchild discretionary use of income while delaying distribution of the principal until the child reaches the age of majority. Such an arrangement would qualify for the annual gift tax exclusion.

1.3. Custodial Transfers.
Generally, a guardian must be appointed to manage gift property received by a minor and safeguard the minor's interests. However, under the Uniform Gifts to Minors Act (UGMA) (N.J.S.A. 46:38-13 et seq.) and the Uniform Transfers to Minors Act (UTMA) (N.J.S.A. 46:38A-1 et seq.), gifts may be made to a custodian on behalf of a minor without the need for any guardianship appointment.

1.3.1. Scope. While the UGMA and UTMA serve similar purposes, some states have replaced the UGMA with the UTMA, which expands the kinds of property that can be transferred to a custodian on a minor's behalf. Whereas the UGMA pertains to a gift of "a security, a life insurance or endowment policy, annuity contract, tangible personal property, interest in a partnership or limited partnership or money to a minor," (N.J.S.A. 46:38-15), the UTMA comes into play through a transfer of "an interest in any property," provided that the transferring instrument specifies that the transferee is acting as a minor's custodian. N.J.S.A. 46:38A-20g.

The UTMA additionally expands the scope of the Uniform Acts by establishing personal jurisdiction over a custodian "with respect to any matter relating to the custodianship." N.J.S.A. 46:38A-4. It also speaks to transfers authorized by wills, trusts, the minor's personal representative or trustee, guardian, or the minor's obligors. N.J.S.A. 38A-1 et seq.

Under N.J.S.A. 46:38-17 of UGMA and N.J.S.A. 46:38A-24 of UTMA, a gift made under these Acts, i.e. a "custodial" gift, is irrevocable and conveys to the minor an indefeasible vested legal title to the gifted property. To make a gift under these Acts, an individual could register the gift property in the name of the custodian, deliver it to the custodian, pay or deliver it to a broker or a bank for credit to an account in the name of a custodian, cause the ownership of a policy or contract to be registered with the issuing insurance company in the name of the custodian, cause the ownership of the property to be transferred by an appropriate document to the custodian, or deliver an assignment of the interest in the property to the custodian.

1.3.2. Termination. The custodianship under these Acts may terminate as early as the time the minor reaches 18 years and no later than the minor's attainment of 21 years. See N.J.S.A. 46:38-27; N.J.S.A. 46:38A-52. Under both acts, (UGMA N.J.S.A. 46:38-27l; UTMA 46:38A-31), the custodian has discretion to terminate the custodianship at any time after the minor has attained 18 years but not prior to the donor's fixed age of termination.

Although creating a trust is more expensive than making a transfer under the Uniform Acts, donors who wish to continue limiting the donee's access to the property after age 21 may prefer a trust over a custodial arrangement.

1.3.3. The Custodian. Donors may select the individual to serve as the custodian and may designate successors. Under N.J.S.A. 46:38-21, the following persons or entities are eligible to serve as custodians: the donor of the property, an adult, the minor's guardian, and trust companies.

Generally, N.J.S.A. 46:38A-32 permits the custodian to determine how much of the custodial property to expend for the use and benefit of the minor. See, e.g. N.J.S.A. 46:38A-32. The custodian may then deliver or spend that portion of the property without court order and without regard to his own or any other individual's duty to support the minor, or any other income or property of the minor which may be available for that purpose.

Both the UGMA and UTMA prescribe the powers and duties of the custodian with respect to the transferred property. Both measure the custodian's duty of care by a prudent person standard. See N.J.S.A. 46:38-27e; N.J.S.A. 46:38A-27. However, under UTMA, if the custodian has a special skill or expertise, the custodian has a duty to use that skill or expertise. N.J.S.A. 46:38A-27.

Under both Acts, the custodian must use discretion as to how much to pay to the minor for the minor's benefit. The custodian also must keep all custodial property separate and distinct from his own property, and any property that requires registration shall be registered in the custodian's name as custodian for the minor. The custodian shall maintain accessible records of all transactions with respect to the custodial property. The custodian also has all the powers with respect to the subject property which a guardian of an estate generally has with noncustodial property. Both acts also permit the custodian to invest in or pay premiums on life insurance or endowment policies if the minor or the minor's estate is the sole beneficiary. Custodial powers are outlined in the UGMA at N.J.S.A. 46:38-27 and in the UTMA at N.J.S.A. 46:38A-26-32.

Custodians under both acts may also use custodial property for reasonable expense reimbursements and compensation. N.J.S.A. 46:38-28; N.J.S.A. 46:38A-35, 36.

1.3.4. Tax Consequences of Uniform Act Transfers. Income from custodial property is taxed to the minor, but if such income is used to discharge a parent's obligation of support, the income will be taxed to the parent.

Making a custodial transfer would be advantageous to a grandparent since the custodial assets would be included in the minor's gross estate, not the grandparent's. However, if the grandparent both names himself as custodian and predeceases the minor, the assets would be included in the grandparent's estate. Therefore, elderly individuals with large estates should name other individuals as custodians.

On the other hand, grandparents whose estates are below the unified credit equivalent ($600,000) are advised to act as custodians, particularly if the custodianship includes appreciated assets. Assuming the donor dies before the minor reaches 21 years, these assets will receive a step-up in basis upon inheritance.

1.4. Potential Tax Consequences from Asset Distribution

1.4.1. Generation-Skipping Tax. In addition to any applicable estate or gift tax, a generation skipping transfer tax is imposed on transfers to beneficiaries who are more than one generation below the transferor's generation. This allows the government to recoup estate and gift tax it would have collected from an intermediate generation had the property transfer not skipped a generation.

Such transfers include any transfer of property by gift or at death, directly or through a trust, to a "skip person," such as a grandchild. However, in cases where the direct lineal descendant of the transferor, the member of the "skipped" generation, has died, no generation-skipping tax is imposed. If the transferee is the grandchild of the transferor and the transferee's parent (who was the son or daughter of the transferor) is deceased at the time of transfer, the transferee is treated as if he were the child of the transferor and all of that grandchild's lineal descendants are stepped up one generation. See I.R.C. ? 2612(c)(2).

Certain exemptions from the generation-skipping tax may apply to grandparent transfers. Specifically, under I.R.C. ? 2611(b), a "generation-skipping transfer" would not include:

(1) any transfer which if made during an individual's life would not be treated as a taxable gift because it was made for education or medical expenses of the transferee, and
(2) any transfer to the extent --

(A) the property transferred was subject to an earlier generation-skipping tax,
(B) the transferee in the earlier transfer was in the same or a lower generation than the transferee in this transfer, and
(C) the transfer does not have the effect of avoiding generation-skipping tax.

Additionally, transfers that pass gift tax free under the annual exclusion rules are also exempt from generation-skipping tax, although transfers in trust generally do not qualify for this exemption. One exception where they do qualify, however, is the case in which the trust affords a broad, discretionary withdrawal power such as in a Crummey trust.

Each individual has a $1,000,000 exemption from the generation skipping transfer tax. I.R.C. ? 2631(a). Therefore, married couples are allowed a total exemption of $2,000,000.

1.4.2. Trust Income Tax Rates. Currently, under I.R.C. ? 1(e), tax is determined for income earned in trust according to the following table:

While grandparents may find tax savings by making transfers to grandchildren in trust, they should be aware of the income tax consequences to their grandchildren as beneficiaries.

1.4.5. "Kiddie Tax". Under ? 1(g) of the I.R.C, children under 14 years old with unearned income are taxed at the rate which would have been applicable if such income had been received instead by their parents. "Unearned" income refers to anything not derived from personal services. I.R.C. ? 911. It includes income the child received through a trust as well as income from assets held in a UGMA or UTMA custodianship.

The "kiddie tax" applies to the income currently derived from all prior gifts. The minor's income is reported on the child's income tax return. Yet, under I.R.C. ? 1(g)(7), with certain factors present, the parents can elect to claim a certain amount of their child's unearned income on their own return, thereby obviating the need for a return to be filed by the child.

Under the Code, in 1996, a child with no earned income would not be taxed on the first $650 of unearned income because of his basic standard deduction. See I.R.C. ? 63(c)(5). The next $650 of unearned income is taxed at the child's own rate; and the amount of unearned income in excess of $1,300 is taxed at the highest marginal tax rate that would have applied had the income been earned by the child's parents. I.R.C. ? 1(g)(3). The child's net unearned income is also subject to alternative minimum taxation at the parents' minimum tax rate. ? I.R.C. 59(j).

For "kiddie tax" purposes, grandparents making gifts to a grandchild may wish to give assets which defer income until the child reaches age 14 because minors 14 and over are taxed only at the child's rate.

2. RAISING A GRANDCHILD

In some cases, grandparents wish to assume more responsibility for their grandchildren as a result of the death of one or both parents of the grandchild. Sometimes, the child's parents may be suffering from an incapacitating illness. The parents could be divorced or drug dependent and unable to care for their child. Perhaps the child's mother or father has been incarcerated, deemed unfit to raise a child, or neglectful.

2.1. Standards to Apply.
New Jersey case law follows a "best interests of the child" standard when determining general custody disputes. With respect to grandparent custody rights, the law is not quite as clear. In 1989, when deciding Zack v. Fiebert, 235 N.J. Super. 424 (App. Div. 1989), which involved a custody dispute initiated by a set of maternal grandparents, the court needed to reconcile several past decisions in order to set forth an appropriate standard.

The court considered Hoy v. Willis, 165 N.J. Super. 265 (App. Div. 1978), in which a paternal aunt was allowed to retain custody because such an arrangement was deemed to be in the best interests of the child. Likewise, the Zack court considered the 1982 decision E.T. v. L.P., 185 N.J. Super. 77 (App. Div. 1982), which modified the "best interests" standard by granting custody to an aunt not only because it was in the child's best interests, but because the plaintiff demonstrated with clear and convincing evidence that the defendant mother was unfit to be entrusted with the care of her child. Finally, the Zack court took account of the decision in In the Matter of D.T., 200 N.J. Super. 171 (App. Div. 1985), which concerned a grandparent's battle for custody. While not resolving whether application of the best interests standard should take into account the question of parental unfitness, the D.T. court held that the custody by a child's natural parents should not be disturbed except for a clear showing of gross misconduct, unfitness, and extraordinary circumstances.

2.2. Reconciliation of Divergent Standards.
In Zack, the court reconciled the seemingly incompatible rulings by holding that because biological parents have both the natural and legal right to raise their child, when a third party seeks custody against them, courts typically must determine whether the parents are unfit. However, where the third party can demonstrate that he or she stands in parity with the parent, the best interests standard should apply. See Zack, 235 N.J. Super. at 432. Such would be the case where a grandparent sought custody of a child whose biological parents were deceased.

In applying its standard, the Zack court denied the grandparents custody in favor of the minors' stepfather who had adopted them. The court based much of its decision on the finding that the grandparents did not stand in the shoes of the parents because the children had a father who had been married to their natural mother.

In 1995, a maternal grandmother petitioned for the custody of her grandchild in S.M. v. A.W., 281 N.J. Super. 63 (App. Div. 1985). In S.M., the subject child had been placed in a foster home when her mother was criminally charged with endangering her life. After the mother died and was no longer living in the grandmother's home, the grandmother moved for custody. Here, the court found the grandmother stood in the shoes of her daughter because not only was the daughter deceased, but the granddaughter had no known paternal relationship. Additionally, the court considered that the child's brothers were already in the grandmother's custody. Applying the "best interests" standard, the court awarded custody to the grandmother.

While grandparents clearly have the legal right to raise their grandchildren, the New Jersey courts have established that the extent of that right depends upon the circumstances surrounding the parents. Without a clear showing of parental absence or severe neglect, a grandparent's custody rights are limited.

3. VISITATION RIGHTS
While the law appears more an obstacle than a protector of grandparent rights relating to raising grandchildren, New Jersey enumerates a set of grandparent visitation rights. Under N.J.S.A. 9:2-7.1, enacted in 1993, an order of visitation would be limited to minor grandchildren who reside in New Jersey. In issuing such an order, the court must consider:

1. the relationship between the child and the grandparent;

2. the relationship between each of the child's parents, or the persons with whom the child is residing and the grandparent;

3. the amount of time elapsed since the child last had contact with the grandparent;

4. the effect that such visitation will have on the relationship between the child and the child's parents or the person with whom the child is residing;

5. if the parents are divorced or separated, the time-sharing arrangement which exists between the parents with regard to the child;

6. the good faith of the grandparent in filing the application;

7. any history of physical, emotional or sexual abuse or neglect by the grandparent;

8. any other factor relative to the best interest of the child.

4. GRANDPARENT RIGHTS TODAY

Grandparents may pursue a number of legal avenues to support and increase their responsibility in their grandchildren's lives. For grandparents as well as all senior citizen groups, these options are becoming more and more accessible. The rapid growth of Elder Law demonstrates the legal system's potential to provide additional rights for grandparents. Along with the educational and human services systems, the legal system should protect those looking out for younger generations -- because sometimes, it takes a grandparent.

Dana E. Rozansky is an associate at the Moorestown firm of Thomas D. Begley, Jr., P.C.