Being a grandparent brings many joys to your life. As a grandparent, you can provide love, impart wisdom, and potentially help financially. Beyond the five dollars I used to receive in a birthday card, there are several ways to help grandchildren. And while you may know many of them, some recent changes have made some options more valuable than others. Creating a plan for how you want to support your grandchildren can bring intentionality to the larger desire to help them. With proper planning, it can also provide tax and other efficiencies to ensure more of those funds go to your grandchildren for the purposes you want to encourage most. Whether it is assisting with college or other expenses as they come up, establishing accounts to hold those assets, creating a plan for regular gifting, or ensuring your legacy passes to them through your estate plan, a little planning can maximize how your generosity impacts their lives. Here are some effective ways to support your grandchildren financially.
By asking yourself several questions, you may better define a plan for giving. The appropriate tools to make the desired impact depend on how much direction to specific uses you want to make and how much control you want to retain. You may want to provide for several different purposes and a plan can tailor your giving to meet the right combination of giving and control that is right for your situation. The right tools may also provide tax efficiencies that allow you to give even more. Here are some questions to help you start refining your giving plan.
· Do you want the impact to be in the near term? Do you want to give a gift for fun extras or vacations? Do you want to provide the opportunity to go to private school? Do you want to help with a first car?
· Is the gift of education important to you? There are several ways a grandparent can make an outsized gift for college explained in more detail below.
· Do you want to control how the gifts are used or are you okay if they “blow it” in their youth if there are no restrictions? Look at using a trust to guide their use of gifts.
· Does it make sense to give regularly to move funds out of your estate and to your grandchildren? Consider an annual gifting plan.
· Does retaining flexibility of assets work best for you? Retaining assets to meet potential needs as you age may make sense while still having a plan for your legacy. Your estate plan can direct your legacy funds.
Recent changes to the financial aid system make grandparent gifting even more valuable. Previously, distributions from grandparent-held 529 college savings accounts could potentially count as untaxed income to the student and reduce needs-based financial aid awards. Effective for the 2024-2025 school year, a grandparent-owned 529 plan no longer counts against the calculation for needs-based financial aid. Rather than contributing to the 529 plan held by the child’s parent, saving to a grandparent-held 529 plan removes those savings from financial aid calculations. Note that this change is related to the Free Application For Student Financial Aid commonly known as FAFSA. Some 200 private colleges use a second system called the CSS profile for calculating aid that still counts grandparent gifts against financial need. Contributing to a 529 College Savings Plan for future education needs provides state tax deductions in some states and growth in a 529 account is not taxed upon withdrawal if used for qualified education expenses. Funds can be transferred from one beneficiary to another to adapt to different grandchildren’s needs. There are also ways to transfer some 529 funds to ABLE accounts for a grandchild with disabilities or a Roth IRA account for one who does not use all the funds for education.
Additionally, paying tuition expenses directly to your grandchild’s college does not count against your annual giving limit. By assisting with college tuition directly, you retain the full annual gift exclusion amount described below, expanding your ability to give even further.
Uniform Transfers to Minors Act account, commonly known as UTMA accounts, are easy to set up to save for a child’s needs in the future. A UTMA allows funds to be used more flexibly than a 529 account, but the UTMA account must pass to the grandchild at their age of majority (typically 18 or 21 depending on the state) without limitations. UTMA rules are specific to each state, so confirm state rules before using this option. The custodian can withdraw for the child’s benefit which can have a wide definition including paying for private K-12 tuition, summer camp fees, or clothing for the child.
Know yourself and, if the potential for buying a sports car when UTMA funds transfer to them would drive you crazy, a trust account may better meet your need. Trusts offer control over how and when the funds are distributed to your grandchildren. The cost to set up the legal documents of a trust and potential additional taxes make trusts more costly to administer, but the guardrails of a trust may be worth it to you. The distributions can be set for specific ages (like a portion at ages 25, 30 and 35), needs (such as health, education and maintenance), or events (down payment for a first home). Importantly, a trust provides peace of mind that your gifts will be used as you intend.
Gifting during your lifetime allows you to see the impact of your generosity and enjoy the satisfaction of helping your grandchildren achieve their goals. The IRS allows you to annually gift up to $18,000 in 2024 to each recipient without incurring gift tax. If you are married, you can effectively double the gift by each giving for a total of $36,000 per recipient. While you can give more, such as to help with a home down payment, you do need to file a Form 709 with your tax return indicating the gift made. A regular plan to give during your lifetime moves assets out of your taxable estate to reduce potential estate taxation, while allowing you to support both regular and specific needs of grandchildren.
Grandchildren can be named as beneficiaries in your will directly or your will can establish a testamentary trust that becomes effective upon your passing. This type of gifting allows you to retain control of your assets should you need them for health or other costs as you age while also ensuring your legacy is passed on to the next generation. You can name them as beneficiaries or contingent beneficiaries of retirement and IRA accounts, but there are extra hurdles to consider if they are not adults. It's crucial to regularly review and update your estate plan to reflect any changes in your family dynamics or financial situation. Work with your financial advisor and estate attorney to consider the potential tax implications of your estate plan.
While providing financial support is important, it's equally vital to instill financial responsibility in your grandchildren. Encourage them to set goals, save and invest wisely, understand the value of money, give charitably and make informed financial decisions. You might consider introducing them to your financial planner to help them in their education. By fostering financial literacy, you're not only helping them make the most of the financial gifts you provide but also equipping them with the skills to build their own financial security.
We want so much for our grandchildren. There are a variety of ways to instill your values and support their future success. Take time to thoughtfully consider the best combination of tools to help them today, tomorrow and into the future.
Reach out today. This could be the start of a great relationship.
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