Strategies for Financial Gifts to Grandchildren

Strategies for Financial Gifts to Grandchildren

May 21, 2024

While I could fill several pages with the insights I have gleaned from working with retirees for almost 20 years, there is one experience I deem most responsible for shifting retirement priorities – becoming a grandparent.  For those fortunate to become grandparents, it is a rewarding experience with an impact that many have trouble putting into words. As clients endeavor to reassess the impact that grandchildren have on their existing financial plan, financial gifts to grandchildren often become a wonderful way to support their future and contribute to their well-being. Often, the addition of a new grandchild may require revisiting existing wealth transfer goals and reviewing corresponding gifting strategies. However, navigating the realm of financial gifting requires careful consideration and strategic planning. Below are some of the most common ways we have been able to help clients bestow financial gifts upon grandchildren, ensuring their prosperity for years to come:

  • Start with a Solid Foundation: Before delving into financial gifting, ensure your own financial house is in order. Evaluate your current financial situation, including your retirement savings, emergency fund, and overall budget and cash flow. It is essential to prioritize your own financial stability to avoid jeopardizing your future security while supporting your grandchildren.
  • Maximize Annual Gift Exclusions: Take advantage of the annual gift tax exclusion by gifting up to a certain amount per year to each grandchild without triggering gift tax consequences. As of 2024, the annual exclusion limit is $18,000 per recipient ($36,000 for married couples). By strategically utilizing this exclusion, you can transfer wealth to your grandchildren while minimizing tax implications.
  • Open a 529 College Savings Plan: One of the most popular ways to gift to grandchildren is through a 529 college savings plan. These tax-advantaged accounts allow contributions to grow tax-free when used for qualified education expenses. By starting early and consistently contributing to a 529 plan, you can help alleviate the burden of future educational costs for your grandchildren. Perhaps the biggest drawback is the limited nature of the gift, in that the tax benefits are limited to use of funds solely for higher education.
  • Contribute to a Custodial Account: Another option is to open a custodial account, such as a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, on behalf of your grandchildren. These accounts allow you to invest funds on their behalf, with the assets transferring to them once they reach the age of majority. Keep in mind that once the child gains control of the account, they can use the funds for any purpose, not just education.
  • Establish a Trust Fund: For more control over how your financial gifts are used, consider establishing a trust fund for your grandchildren. Trusts offer flexibility in specifying conditions for distributions, such as funding education, purchasing a home, or starting a business. We often encourage the guidance of an estate planning attorney to determine the best trust structure based on your goals and preferences.
  • Gift Appreciated Assets: Instead of cash, consider gifting appreciated assets such as stocks, bonds, or real estate to your grandchildren. Not only does this provide them with a valuable financial asset, but it also offers potential tax benefits for the donor. By gifting appreciated assets, you can potentially avoid capital gains taxes while passing on wealth to the next generation.

Giving financial gifts to grandchildren is a meaningful way to invest in their future prosperity. Whether through education savings accounts, trust funds, or strategic asset transfers, there are various avenues to support your grandchildren's financial well-being. Utilizing the strategies above often results in a more targeted and thoughtful gifting strategy, providing donors the opportunity for greater control and satisfaction surrounding their wealth transfer goals.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

- The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.