Making Financial Gifts to Grandchildren
Giving money to grandchildren used to be a lot simpler than it is now. When I was seven, my grandparents sent me the best birthday card I ever received. On the inside was a gaily painted elephant juggling ten dimes, all carefully tucked into slots in the card. I was so excited that I couldn't bring myself to take the dimes out of that card for days. I thought I was the richest girl in the world, and maybe at that moment I was.
Times have changed, and grandparents today may have more money to give their grandchildren than a dollar's worth of dimes. For those who do, there are countless ways to help grandchildren financially, from smoothing the road in bumpy financial times to paying part of the exploding costs of schooling.
First Things First
Before making a financial gift to grandchildren, look carefully at your own financial situation, preferably with a professional planner. Make sure you're in a position to give, if that's what you want to do. If you're not, don't worry about it. Your grandchildren will not love you any less. It's more important to secure your financial future than to risk it with gifts you can't afford.
Next Things Next
A lot more goes into deciding to give a financial gift than just having the resources to do it. Ask yourself these questions:
- Why are you doing this?
- Is reducing your estate a factor?
- Do you want your granddaughter to be able to use your gift for anything she wants or only for college?
- If your grandson wants to spend the money for a sports car instead of a college education, will you help him pick one out, or will you regret you ever gave him the money?
- Do you want to take an active part in managing your investment?
- Do you feel comfortable giving now, or would you prefer making gifts in your will?
How you answer these questions will help determine what kind of gift is best for you.
Narrowing the Choices
Grandparents who are willing and able to make substantial financial gifts to their grandchildren face a large number of choices. There are joint accounts, custodial accounts, IRAs, trusts, savings bonds, and 529 accounts. None should be opened without consulting your own children and a financial advisor. You and your children should agree on your goals, understand the tax laws, and consider any impact on financial aid eligibility. If you don't work together, serious financial consequences could arise. There are three popular vehicles for making financial gifts.
Cash Gifts. Each grandparent can give up to $11,000 a year to a grandchild, child, or anyone else for that matter, without incurring a gift tax. This is a "no-strings-attached" gift. Once you make the gift, you give up all control over it. Grandparents can also pay a grandchild's tuition (not room, board, or books) directly to the school he or she is attending and incur no taxes. Neither the tuition gift nor the $11,000 annual gifts are included in the lifetime gift tax exemption of $1 million.
Section 529 Plans. Many financial experts agree that state-sponsored 529 plans are the best way to save for a college education. Authorized by Congress in 1996, funds in these accounts are fully tax free through 2010, when used for college expenses. Some states also give their own tax deductions. The owner of the account has complete control over the money and can change the beneficiary if he or she wishes. 529 accounts can also fund your own continuing education.
Section 529 accounts fall into two categories:
- Prepaid tuition savings. Funds are used to lock in tuition rates at state colleges and universities. These funds can also be used for private or out-of-state-institutions, although the full amount may not be available.
- College savings plans. Funds can be used at any college or university, public or private, and some foreign institutions.
All 50 states offer Section 529 accounts. Some are better than others. Research which ones are best and enroll in one of those. You needn't live in the state to participate.
Coverdell Savings Accounts. Formerly known as Education IRAs, Coverdell savings accounts allow an annual contribution of $2,000 toward elementary, secondary, or college education costs. The money grows tax free, but assets of the account belong to the recipient when he/she reaches age 18. Owners of Coverdell accounts must have incomes below $110,000 if single and $220,000 if married. A Coverdell account is considered an asset of the student and can substantially reduce the student's eligibility for financial aid.
The Bottom Line
There are no rules about giving. Whether you give or not depends on a number of things, including your resources, personality, health, and relationship with your family. If you choose to give, good for you. If you choose not to, that's OK too. And if you simply can't afford to, remember money isn't everything. It's not a kiss on the cheek, or a nap in your lap, or a sympathetic ear. In the end, those are the most valuable gifts you can give your grandchildren.
AARP Resources
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3
Other Savvy Ways to Pass Money to Grandchildren
Information on gift taxes, direct tuition payments, and generation-skipping trusts -
Section
529 Plans Offer Tax Incentive to Save for Grandkids'
Education
Advantages of Section 529 plans and a few cautions -
Pomp,
Circumstance, and Tax Shelters
Options for financing grandchildren's educations
Other Resources
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Savingforcollege.com
Extensive information on Section 529 plans and Coverdell accounts -
College
Savings Plans Network
General and specific information for grandparents on Section 529 plans. -
Kiplinger.com
More information on Section 529 plans
Books
These books are available from Barnes & Noble.com:
- " The Best Way To Save for College: A Complete Guide to Section 529 Plans," Joseph F. Hurley, Savingforcollege.com Publications, July 2003
- " 529 and Other Savings Plans for Dummies," Margaret Munro, John Wiley& Sons, December 2003.
- " The Nanas and the Papas: A Boomers' Guide to Grandparenting," Kathryn and Allan Zullo, Andrews McMeel Publishing, August 2004
