It's no secret that parents of young children have a lot of expenses — from nursery furniture and clothes to childcare costs. Parents of older children may be paying for expensive sports teams, tuition and travel. Because parents may be particular about the items and services they buy for their children, it's sometimes easiest to write a check and let them choose how to spend your gift. But there are several other ways to give gifts to the child.
Here are four options to consider:
You can give a generous amount to your grandchild's family each year without affecting your taxes now or your lifetime gift-tax exclusion later. In 2024, you and your spouse can give up to $18,000 tax-free per year to any individual.
So if you're married, you and your spouse combined could give up to $36,000 per year to your grandchild and to each of the child's parents, for a grand total of up to $108,000 (three combined gifts with your spouse of $36,000) under current tax law. That could pay for a lot of nursery renovations, nanny hours and other expenses.
You also can pay unlimited qualified medical and tuition expenses on behalf of family members, without gift tax implications, if you pay the bills directly to a health care provider or educational institution.
Putting money into a 529 college savings plan when your grandchild is young gives the investments plenty of time to grow. And your grandchild will need all the college money he or she can get. There's no way to know what college will cost at the time he or she enrolls, but tuition and fees for public, in-state, four-year colleges average $11,260 for the 2023-2024 academic year, while private colleges cost a hefty $41,540 for the 2023-2024 academic year, according to the College Board's Trends in College Pricing.
529 plans offer two options:
If you make contributions to a 529 plan owned by your grandchild's parents, it's straightforward. You can add money to the fund whenever you like. You don't have to manage the fund's investments, worry about how it's performing or keep track of account withdrawals once your grandchild is in college.
On the other hand, you could also choose to open your own 529 plan for your grandchild's benefit. In that case, you're the account owner so you're in control. You choose where to open the 529 account (directly through a state-sponsored plan or through a broker or other financial institution), as well as how aggressively or conservatively the funds are invested.
One caveat: If you own the 529 plan, this could eventually affect your grandchild's ability to qualify for financial aid. Why? Federal financial aid formulas consider distributions from a 529 plan owned by grandparents as "untaxed income" to the recipient. That money can have a big impact on aid. Your financial advisor may know of ways to blunt the impact of this.
How much can you put into a 529 plan? Generally, in 2024, you can contribute up to the annual federal gift-exclusion amount of $18,000 per person (or $36,000 between you and your spouse). A special rule also allows you to front-load a 529 fund in 2024 with a lump-sum of $90,000 or $180,000 for a married couple. That's the equivalent of five years of annual gifts of $18,000 per grandparent or $36,000 as a married couple. If you do this, you must file an IRS Form 709 gift tax return and indicate that you're treating the 529 gift as if you had spread it over five years.
If you want to set aside money for your grandchild without earmarking it solely for college, you might consider a custodial account. These include Uniform Transfers to Minors or Uniform Gifts to Minors accounts, depending on what your state allows. You can contribute as much to these accounts as you'd like, but, as with the other gifts mentioned here, anything over $18,000 per year in 2024 will generally have federal gift tax implications.
One advantage of a custodial account is that the trustee (such as a bank representative or other individual you name) oversees the money while the beneficiary is young. Also, the money has to be used for your grandchild's benefit. For instance, your adult son couldn't tap the money to buy himself a new boat.
Keep in mind, the investment income in a custodial account may be subject to the Kiddie Tax. Under the Kiddie Tax rules, in 2024 an affected child's investment income that exceeds $2,600 — such as income from the assets in a custodial account — may be taxed at the parent's higher rates. This is true even if all the money to fund the custodial account came from a grandparent or someone other than a parent.
It's also important to know that custodial funds are turned over to the grandchild when he or she turns 18 or 21, depending on the law in his state. Even the smartest child can become a financially irresponsible 20-something-year-old, particularly if he or she has access to a substantial sum of money. So consider that possibility when deciding how much to put into a custodial account.
If you don't want to financially help your grandkids now, you may want to name them as beneficiaries in your will, living trust or life insurance policy. This can ensure that they eventually share in your family's financial legacy.
Suppose your grandchild is still a minor when he or she inherits property, cash or investments. If that's the case, a custodian of the Uniform Transfers to Minors account can oversee the inherited assets until the beneficiary is a legal adult (age 21 in most states).
If you're not sure about the best way to financially help your grandkids, talk with your financial and tax advisors. Experienced financial professionals can help you sort through your choices and suggest options that might work best for you and your family.
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