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Giving Money to Your Grandchildren

Tips for protecting your financial stability as you help others

In Spanish | Let's hear it for grandparents! Financial planners tell me that, increasingly, you're stepping up to help your grandchildren, especially with higher education expenses.

"There's more of this going on than in the past, because more of the parents are hurting financially," says Westwood, N.J., planner Tom Orecchio. Also, "Grandparents have a soft spot for giving to grandkids," says Columbus, Ohio, planner Gary Vawter, "all the more so if the parents need less."

Grandmother talking to granddaughter on couch.

Consider tax breaks and your own budget when making financial gifts to grandchildren. — Getty Images

Before you start writing checks, however, be sure that you have enough saved for yourself — to get through a business downturn or cover the potential cost of long-term care. God forbid you should have to ask for the money back.

You risk spending too much by making fixed, future promises, such as "$5,000 a year for each grandchild for college." That might become an albatross around your neck in your older age. Instead, stay flexible, says planner Courtney Weber of Cincinnati. Your family should understand that one year's gift may be larger or smaller than the gift the year before, or may not come at all.

One approach is to vary your generosity by the size of your investment portfolio, Vawter says. Establish the floor amount you feel that you need for your own security and make gifts only in years that your nest egg is worth more than that. Alternatively, you might help with specific bills, such as braces or medical expenses not covered by insurance. If you pay the doctors directly, it won't affect the annual amount you can give that same grandchild, gift-tax-free ($14,000 in 2013; $28,000 for married couples filing jointly).

Tax-favored 529 plans for college — a common grandparent choice for young children — are flexible, too. Make an initial contribution to open the plan (as little as $5 to $15, but you'll probably want to start with more), then add money as you can afford it. The plan is invested in mutual funds. There's usually a state tax credit or deduction for your contributions. The funds can grow tax-free if used for higher education, as planned. If the parents live in another state, and start a 529 for the same child there, they might get a tax credit or deduction, too.

What's more, 529s hold a unique place on the shelf of estate-planning tricks for people with substantial wealth. Any money you put into these plans is out of your estate, so it escapes the estate tax. But if you find that you're low on cash, you can take the money back, subject only to a 10 percent penalty on the money your contribution earned.

All the states except Wyoming have 529s. To see what they offer and how good they are, go to If there's no state tax deduction, or a low one, consider a low-cost plan from another state. Buy a "direct-sold plan" online, rather than a plan sold by a commission-based financial adviser. The states charge higher 529 program fees for adviser-sold plans, the advisers themselves put you into more expensive, actively managed mutual funds, and there may be sales commissions. A high total expense fee would be 1.5 percent a year and up. The lowest-cost plans that accept residents from other states — Virginia, New York, California and Ohio — mostly come in under 0.25 percent.

If you don't want to limit your giving to education, or don't care about tax breaks, you might simply set up a separate account marked "grandchildren," says planner George Middleton of Vancouver, Wash. You maintain control of the money and can dole it out at will.

Your grandchild can use 529 money for tuition and fees at any accredited school in the country, including community colleges, trade schools and professional schools. All 529 plans permit students to attend selected colleges abroad. If he or she decides not to start, or finish, school, or need all the money, you can transfer what's left in the plan to another family member, tax-free.

If you've been making regular year-end gifts to your adult children, they might not take kindly to your switching some of that money to the grandchildren. Your children might rely on those gifts to pay their property taxes, rather than saving in advance, says Houston planner Larry Maddox. That goes to my point about maintaining flexibility. It doesn't sit well for children to depend on your generosity for their style of life.

More grandparents are also leaving money directly to grandchildren in their wills, if they think the parents are living above their means. In Kansas, the thinking goes like this, says planner Randy Clayton of Topeka: "I want to be sure that my grandchild can get an education. If I leave all the money to my kids, I'm not sure my grandchildren will get anything, because the kids will spend it all." Besides, adds Middleton, mischievously, "Grandchildren are young and lovable with no apparent flaws — yet."

Consult your financial or tax adviser for advice regarding your personal situation.

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