Giving to the Grandkids
Are you being wise with your resources?
There are 70 million grandparents in our nation today, and their numbers are increasing twice as fast as other US household types1. The average grandparent age is now just 48! Grandparents control about 75% of the wealth in our county and spend $52 billion annually on their grandchildren. If you are a grandparent or think you might be one day, it makes sense to learn how to be smart about your support and gifting. Once a child has basic needs met (and every toy under the sun), you start to think maybe there is something else you can do with your money.
Time & Memories
If your focus is on quality time spent with your grandchildren, then ‘field trips’ and educational travel are fantastic ways to build experiences and memories they will cherish. For most families, the money spent is not the important factor. A day spent hiking and enjoying nature can be just as much fun for a kid as a day in Legoland™. Just make sure you do the hike first. 😉
Medical Expenses and Private School
Federal tax code allows you to use or give up to $14,000 per grandchild annually without incurring a gift tax. As long as you pay providers directly, you can help cover medical costs and private school tuition and this support is not counted toward the gift tax limit.
If your goal is to help fund college, then an annual $14K gift to a grandchild requires the parents to be savvy and disciplined so the money will still be there when tuition time comes. If the grandchild expects to apply for financial aid, the money you give them will count as their income or assets, so be aware of the timing rules. 100% of a child’s assets are considered eligible for college tuition and up to a 25% contribution per year is expected, vs. only 5-6% of certain parental assets being assessed. The exception is a child-owned 529 account, which is now treated as ‘parent-owned’. The grandparent can be the custodian of the 529 and that controls the parents’ self-discipline.
Grandparent-owned 529 plans are more off the radar as far as asset calculations for financial aid, and they can be used for any grandchild. But once you distribute from such a plan (and this check should go directly to the college), it counts as untaxed student income the next year. One strategy (and incentive) might be to just contribute in their senior year if they are not going straight to grad school. If you die before the money is paid out, the beneficiary will get the money right away, which can also trigger tax issues. Different colleges use different formulas so you need to know how things are calculated to make sound gifting decisions. There are a lot of IF’s!
Look Out For #1
This may feel like a selfish sentiment, but the bottom line is that you don’t want to give so much to your grandchildren that you outlive your resources and become dependent on them! Your children may have their hands out and be very appreciative of your help. They won’t be so happy if their retirement is impacted by your generosity to their children by them having to care for you. Student loans can be a better way to go. Most importantly, get advice from a financial planner and a tax advisor who know the college aid rules.
1 The American Grandparents Association