Grandparents are famous for spoiling their grandchildren. And it’s so easy when they’re young. Between extra desserts after dinner to buying new toys, everything lights up their faces – and melts your heart.
But what about larger gifts, such as contributing to their college fund or helping them buy their first car? While financial gifts can give your grandchild a head start in life, there are things to consider. Review the following tips to ensure you’re making wise decisions for everyone involved.
Understand the Tax Implications
While it feels like you should be able to gift money to everyone you want, Uncle Sam and the IRS think differently. There are some restrictions on how much you can gift without incurring a tax liability. Fortunately, these amounts are quite generous.
In 2023, you can gift a person up to $17,000 without tax implications ($34,000 for a couple filing their taxes jointly). Assuming you have three grandchildren, you and your spouse could contribute $102,000 annually without paying any gift taxes ($34,000 x 3). While you won’t incur taxes, depending on how the money is invested, your grandchildren might be required to pay taxes on future earnings.
Most grandparents are already enjoying their golden years or will be soon. That often means you’re living on a fixed or limited income. Before giving financial gifts, you must consider your own financial situation.
Another thing to keep in mind is future grandchildren. For example, if you put a significant amount of money toward your first grandchild’s future education costs, will you be able to do the same for others? It’s often best to start small to ensure your gifts can be fair to all grandchildren.
Involve the Parents
While your intentions might be genuine, speaking with their parents first is always best. Explain how you’d like to contribute to their child’s future and ask for their feedback. They might suggest other ways to help. For example, many working parents struggle to afford rising daycare costs. Perhaps your contributions could help cover those expenses, or you could watch the grandchildren on certain days to alleviate those costs entirely.
Anytime money is involved, it’s wise to ensure everyone is on the same page. That includes regularly updating one another on contributions or changes in the plan.
When saving money on behalf of your grandchild, it’s wise to set goals and timelines. Doing so will help keep you organized and ensure the money is available when they need it.
For example, you might decide to put $1,000 a year into their college fund. If you start when they are a baby, that will amount to $18,000 - plus eighteen years’ worth of compound interest!
Anytime you gift money, you should keep a record of the transaction. First, you want to always make sure you have your financial ducks in a row should the IRS have questions. Second, it will help keep you organized.
Using the example above, imagine you have five grandchildren, and you’re contributing to various college funds. Keeping proper records will help to ensure you don’t overlook a donation or deposit the wrong amount.
Communicate Your Intentions
Anytime you gift money, you should make it clear how you intend those funds to be spent. Unfortunately, even if you state their purpose, it might not happen.
For example, imagine you gift your grandchild $10,000 to cover part of their college tuition. While the intention is clear, there’s no guarantee they won’t use that money to jet off to Hawaii for an extended vacation.
So, how you gift money can be just as important as the funds you donate.
Ways to Gift Money to Your Grandchildren
There are a variety of ways to make monetary gifts. However, if your goal is to ensure the money is spent in a specific manner, using avenues you control might work best.
Here are a few options to consider:
If you want to keep your grandchild’s money apart from your own, consider opening a separate account at the credit union. This account can still be in your name so that you maintain control. Make regular deposits and use higher-earning investments like Share Certificate Accounts to grow the funds. You can easily make withdrawals whenever the money is needed.
A 529 account is a state-sponsored, tax-advantaged savings plan for future education costs. As one of the most popular college savings tools, the account can remain in your name. Then, you list your grandchild as the beneficiary. Once they attend college, withdrawals can be made to cover education-related expenses, such as tuition, room and board, books, and supplies.
There is no limit to how many 529 accounts a person can be listed as a beneficiary. If the parents already have a 529 account for the child, you could also open one.
There are a variety of custodial accounts, such as UTMA (Uniform Transfer to Minors Act) accounts. A designated party will maintain the account, typically you or a parent. Once the grandchild reaches a specific age (it varies by state), they can access the account and funds.
Still, there are even more options you might consider ensuring your monetary gifts are spent as you intend. For example, you could set up a trust for your grandchild. Some of these matters are more involved, and it’s encouraged you consult your financial advisor or estate planner.
We’re Here to Help!
Choosing to make financial gifts toward your grandchild’s future is admirable. However, it’s wise to review all your options and create a strategy to ensure your contributions don’t affect your retirement plans.
If you’re interested in opening an additional account at the credit union to begin putting money aside for your grandchild, we’re here to help. Please give us a call to get started today.