Many grandparents want to benefit their grandchildren, in addition to gifts they may make or leave to their children. Certainly one aspect of this is the relationship that grandparents may have with their grandchildren.
Gifting can be helpful for tax and estate planning purposes as well, in addition to helping your grandchildren become more financial secure.
The simplest way to making gifts to a grandchild is an outright gift. You may give each grandchild up to $14,000 per year (in 2014) without needing to file a gift tax return. If you’re married your spouse also can make a gift. The numbers can add up.
Example: John and Mary want to make gifts to their 5 grandchildren, and ask you how much they can give this year without filing a gift tax return. They each may gift up to $14,000 per year, which would be $28,000 times 5 or up to $140,000 per year without gift tax. Of course, John and Mary may gift less than this amount, but they are relieved that this will not involve extra tax returns or gift taxes.
But is it wise to make outright gifts to your grandchildren? That depends on the size of the gift, and whether you’d like to have some control over how the money is spent. Particularly if you’re making a large gift, whether in one year or over time, you may not want to make those gifts outright. The grandchild might still be a minor, or you may worry that while an adult they would not use the money wisely. Also, keep in mind that the gifts could have Medicaid implications for the grandparents.
Here are some ways you can have more control over how the funds are used by grandchildren:
- Consider paying for educational and medical costs for your grandchildren. There is no limit on these gifts; you can pay these expenses in addition to making annual $14,000 (in 2014) gifts. But you have to pay the school or medical provider directly to get this exemption.
- If your grandchild is a minor, you can make gifts to a custodial account that parents can establish. However, if you want to have control over these funds after the grandchild reaches age 18, you may want to use trust arrangements to delay receipt until the grandchild is older (and wiser).
- You can transfer money into a trust that either you or their parents establish to benefit your grandchild.
- You can provide funds for the grandchild’s higher education through a “529 account.”
- You can buy savings bonds for them.
- You can stretch your IRA through an IRA Retirement Trust, to ultimately benefit your grandchildren with tax-free growth of the funds.