If you have grandchildren, the chances are good that their futures weigh heavily on your mind. With college costs continuing to skyrocket and more bad news on the television every day, many grandparents find themselves wondering just what sort of life the grandchildren they treasure are going to have.
Today, we’re going to talk about the best ways grandparents can give money to their grandchildren. We’re going to cover seven different options, as well as a few other considerations to ensure the process goes smoothly.
They say that money can’t buy happiness, and that’s probably true. It can buy peace of mind, though, both for you and your grandchildren. We’re here to help you make that happen.
What Is the Best Way To Give Money to My Grandchildren?
The best way to give money to your grandchildren will depend on your circumstances and theirs. However, we have a list of some of the best options to consider, which ought to help as you do your research to ensure you’re making the right choice.
UTMA or UGMA Account
The Uniform Gifts to Minors Act (UGMA) and its later expansion, the Uniform Transfers to Minors Act (UTMA), allow the creation of custodial accounts. For your purposes, that means the account is in your grandchild’s name, but you have control over it until they reach the age of 18 or 19 if they live in Alabama or Nebraska. If you want to learn more about the particulars, we’ve linked to the Investopedia page for each.
The main benefit of one of these accounts is that you don’t have to establish a trust, which can get complicated from a legal perspective. You’re the one that pays taxes on it until your grandchild is of age, so it’s nice for them not to have to worry about that.
You’ll run into drawbacks when your grandchild starts applying to colleges. The FAFSA counts UTMA and UGMA accounts as their assets, which generally reduces the amount of aid they’re eligible to receive.
529 plans, also called qualified tuition plans, get their name from Section 529 of the IRS tax code, which authorizes them. A 529 plan is meant to encourage families to save for future educational expenses. Depending on the state in which you live, you might get tax advantages for using one.
Two types of 529 plans exist: education saving plans and prepaid tuition plans. The funds in an education savings plan can generally be used for tuition, room and board at a university, and tuition at an elementary or secondary school. Prepaid tuition plans, in contrast, are usually only applicable to tuition at colleges and universities that are participating in the program.
529 plans give you more control over how your money is spent without necessitating a trust. Still, they might influence your grandchild’s ability to qualify for enough financial aid to make their educational journey possible. You can check out the U.S. Securities and Exchange Commission’s page on 529 plans to read more.
Individual Retirement Account
Your individual retirement account (IRA) might not be the first thing that comes to mind when you think about giving your grandchildren money. You can leave your IRA to your grandchildren if you pass away, and it’s an effective way to leave them money. However, there are a few things to consider.
- Minors cannot inherit an IRA outright, so it’s best to name a custodian for the account that you trust.
- Unless your grandchildren are disabled or chronically ill, they have to distribute your IRA within ten years according to the SECURE Act.
- If your IRA wasn’t a Roth, your grandchildren will probably be subject to income taxes on it.
If this is an option you’re considering, we highly recommend running it by your financial advisor first. Taxes and inheritance laws can get complicated quickly, and they will be more familiar with the specifics of your financial situation. Your financial advisor will be able to tell you whether there are better options.
Naming your grandchildren as the beneficiaries of your life insurance policy is another option you have to give them money. Unfortunately, doing so might be even more complicated than leaving them your IRA if your grandchildren are minors.
If your grandchildren haven’t reached the age of majority, they cannot directly receive the benefit from your life insurance policy. Instead, you will need to appoint a legal guardian for the funds. If you don’t, it will be up to the state to do so. If the state gets involved, the process slows down and becomes expensive.
If your grandchildren are minors, you can set up either a UTMA account or a trust for the money, leaving a custodian in charge of managing it until they reach the age of majority.
You can also name your children as the primary beneficiaries, with your grandchildren as the secondary beneficiaries. That way, you don’t have to worry about dealing with appointing a guardian, while your grandchildren are still likely to benefit from the money.
If your grandchildren are over the age of majority, you usually don’t have to worry. There are some situations in which the death benefit from your life insurance policy is taxable, although most of the time, taxes aren’t an issue either.
Educational and Medical Costs
Education and healthcare are two of the leading causes of debt right now. If, for whatever reason, you don’t want to or can’t give or leave money directly to your grandchildren, you can pay for their education or medical treatments.
The relevant legal statute is a headache to read through, so we’re going to do a quick summary to save you the trouble.
In general, you can give money directly to the college or university your grandchild attends without incurring any tax penalties. However, you can only cover tuition. Other expenses like room, board and textbooks aren’t covered. If you’re interested, you can give your grandchildren up to $15,000 as of 2021 without having to file a gift tax return, and that should be enough to cover most non-tuition costs.
The same rules apply to medical costs. You can pay as much as you would like directly to your grandchild’s medical provider for a diagnosis, cure, treatment or preventative care without taxes. For any costs you cannot cover that way, the 2021 gift tax limit is $15,000.
Savings bonds are a classic choice when it comes to ways to give money. Everything is electronic now, but the basic principle is the same. You and your children set up accounts through the Treasury Direct website. From there, you purchase a gift bond and transfer it to an account in your grandchild’s name, linked to the account or accounts of their parents.
Interest on the bond grows tax-deferred until it’s cashed, although using the bond to cover higher education costs may result in the interest being tax-free.
While very safe as far as investments are concerned, savings bonds offer a low rate of return. It can take 20 years for them to double in value. You can purchase bonds in amounts ranging from $25 to $10,000. If you’re on the lower end of that scale, it’s hardly worth the trouble.
Fund Their First Savings Account
Our final suggestion for giving money to your grandchildren is to fund their first savings account. It’s a safe option and a good way to help teach your grandchildren about financial responsibility. Unlike an investment in the stock market, the amount of money in the account won’t decrease unless it’s spent.
The interest rates on savings accounts aren’t what they used to be. Currently, the national average for the interest rate on a savings account is about 0.04%. That’s uninspiring, to say the least, especially when you consider that inflation is likely to outpace it.
The money you put in a savings account for your grandchildren may end up having less purchasing power by the time they get to college than it did when you first opened the account.
What Should You Know Before You Give?
There are a few things you should know before you give money to your grandchildren to make your gift as meaningful and effective as possible.
Your child and their spouse may have already saved to cover certain costs, so in most cases, it’s best to ask them before you give your grandchild money. They’re also likely more familiar with your grandchildren’s behavior and level of responsibility, so they may be able to tell you whether a cash gift is a good idea or not.
Understand the Tax Rules
It seems as if taxes get more complicated every year. Before you give your grandchildren money, do your research or consult with an expert to determine whether the gift is worth it or if most of the money will be taken for tax purposes.
Knowing your options is essential to making an informed decision when it comes to your finances. If you have the opportunity and resources to invest in your grandchildren’s future, you can permanently change their lives for the better.
We’ve covered seven potential options for gifting money to your grandchildren today to give you some idea of where to begin, but consult with your financial advisor before making any decisions. For more advice and information, you can check out the rest of our blog or contact us today.