Whether you’ve been a grandparent for a single day or two decades, you’ve probably already realized that there’s not much you wouldn’t do to help your grandchild. Especially for those with significant means, making informed decisions about how much and what type of help is most beneficial for a grandchild involves thoughtful planning, good communication, and careful consideration of financial, tax, and other implications.
For one thing, you may be concerned about the ability or inclination of the recipient for wisely handling a significant financial gift. And this is no small matter; by some estimates, the GenX and Millennial generations (roughly, those born between 1965 and 1996) stand to inherit some $68 trillion from their parents and grandparents over the next couple of decades. It’s no surprise, then, that some grandparents contemplating a major gift may be looking at their grandchildren and thinking, “Are these kids ready?”
1. Starting small. On the other hand, it’s important to remember that not all wealth transfers necessarily happen in huge sums. Sometimes smaller, more targeted gifts can be very helpful for the grandchildren as a kind of “training exercise” for the future. Grandparents may choose, for example, to provide a financial boost for certain expenses that their grandchildren may incur as they prepare for and enter their careers, such as higher education expenses or the down payment on a first home. Reducing the debt burden incurred by the younger generation as they “launch” may also encourage them to avoid financially unproductive behaviors such as excessive credit card debt. For grandparents considering this approach, a simple method is to provide an outright gift. In 2023, you can make a gift to a grandchild (or anyone else) of up to $17,000 ($34,000 for a married couple) without paying gift tax. In fact, many individuals systematically utilize their annual gift tax exclusion to reduce the size of their taxable estate.
2. Education funds. For grandparents who especially want to provide support for education, a 529 plan may be the answer. These qualified tuition plans, commonly called 529 plans after IRC Section 529, enjoy tax-free compounding and growth, enabling them to increase over time without the drag imposed by taxes on dividends, interest, or capital gains. Second, funds withdrawn from the plan to cover qualified educational expenses are tax-free for the recipient, whether that is a student paying college tuition or a parent paying on the student’s behalf. And these plans have become even more popular since the 2017 passage of the Tax Cuts and Jobs Act, which expanded the definition of qualified educational expenses to include tuition and other costs of attending a private elementary or secondary school. Since the inception of 529 plans in 1996, parents and grandparents have put more than $398 billion into them. A significant advantage of these plans is their flexibility when it comes to gifting. For example, if the original plan beneficiary finishes college without using all the funds in the plan, the plan owner can change the beneficiary to a younger sibling, who can then use the remaining funds to pay for a private elementary or secondary school or when entering college. In fact, the beneficiary of the plan can be changed to any other family member, which could include, in addition to the original beneficiary’s sibling, their parents, aunts, uncles, nieces, nephews, stepparents, or even first cousins. For these and other reasons, many high-net-worth individuals utilize 529 plans as part of their estate planning strategy, since the plans permit gifting assets which can then grow tax-free and also be withdrawn from the plan tax-free, as long as the withdrawals are used to pay for qualified educational expenses.
3. Putting up guardrails. Still, some grandparents may find it prudent to establish firmer guidelines, especially when a significant bequest is involved. This is where a properly designed trust can be a useful tool. A trust can hold assets for the beneficiary (such as a grandchild) while creating stipulations for how and when the money can be used by the beneficiary. A grandparent might wish to delay granting major sums, for example, until the grandchild reaches a certain age, successfully completes a college degree, or secures significant employment. Such terms can be written into the trust, helping to ensure that the grandparent’s oversight extends for as long as the trust remains in existence.
At The Planning Center, we understand that each family’s situation is unique, requiring an individualized, custom-made approach. Whether your need is deciding on the best gifting strategy for a grandchild or crafting a plan for a secure, satisfying retirement, our fiduciary duty means that every recommendation places your best interest foremost. To learn more, visit our website to read our article, “Why You Should Work with a Fee-Only Fiduciary.”