Making financial gifts to your grandkids can be a great way to help your descendants get a good start in life. Depending on the size of your estate, it may also be a tool to maximize gifts to your heirs while reducing the taxes due upon your death.
Before giving, be sure you understand the tax consequences of your gifts. Here are some options and tips to think about before you give:
Know the tax rules. You can give each grandchild up to $16,000 a year (in 2022) without creating a taxable event. Two grandparents together can give up to $32,000 per grandchild (or any recipient) per year with no reporting requirements.
For example, a married couple with six grandchildren may give away up to $192,000 per year without gift tax implications. If you have a large estate and expect to exceed the federal estate tax exemption ($12.06 million in 2022, $24.12 million per couple), maxing out your annual exclusion gifts can be one strategy to optimize your wealth transfer.
If you’re thinking about gifts as a way to get money out of your estate, start planning now. The $12 million estate tax exemption is set to revert to $6 million in 2026.
Of course, you need to keep enough for your own needs. Grandparents who could potentially deplete their estates with long-term care needs should know that any gifts can interfere with their Medicaid eligibility for up to five years. If that’s your situation, planning for after-death gifts may be a better option.
Talk to the grandchild’s parents first. Communicate with your kids before making a large gift to your grandchildren. Your children may have strong feelings about how much financial support their children should have, and when. Likewise, they may have insight into a grandchild’s problem spending issues or even legal challenges that they’ve kept private from you.
Paying for college. If your goal is to put money away for a grandchild’s education, 529 plans are a tax-advantaged way to do that. Be aware, you can also make unlimited payments for tuition and medical expenses for anyone you like, with no estate tax consequences. Just be sure you pay the school or healthcare provider directly.
UTMA or UGMA accounts. UTMA and UGMA accounts are taxable investment accounts set up to benefit a minor, but controlled by an adult custodian until the child reaches a certain age, between 18 to 21, depending on what state they live in. Money in these accounts can be used in any way for the child.
IRAs. As a grandparent, you can open an IRA for your grandchild and help them get a start on retirement savings. To be eligible, your grandchild must have earned money during the year. You can contribute as much as they earn, annually, up to $6,000.
Trusts. Giving to grandchildren through a trust can offer you more flexibility and control over how those funds are distributed. One of the advantages of a trust is that you can work with an attorney to draft guidelines on when the income and principal will be available to the grandchild and/or how the money can be used.
To determine the best way to provide for your grandchildren, consult an estate planning attorney.