Perhaps the simplest option is to make outright financial gifts to grandchildren. As of 2021, each grandparent may gift up to $15,000 a year to each grandchild, tax free. That means, if you are married, you and your spouse may each gift $15,000 per grandchild for a total of $30,000 per year. Additionally, the gifted money will not count as taxable income to your grandchildren. Perhaps the biggest downside to this option is that there is no way to regulate how the money is spent. You may have gifted the funds with the intention that it would be put towards college tuition, but your grandchild might instead book a lavish spring break trip on your dime.
Establish a trust and name your grandchild as the beneficiary
Establishing and funding a trust for a grandchild enables the grandparent to retain a certain amount of control. They are able to set guidelines around how the money should be used, help their grandchild reach certain financial goals, and release funds based on age or various milestones, such as graduating from school or having a child of their own. Learn which mistakes to avoid when establishing a trust.
Make gifts to a custodial account
Parents may establish custodial accounts for minor children, which grandparents may then make gifts to. As the accounts are in the name of the children, the tax liability is shifted to their presumably lower tax bracket. A major pro to these types of accounts is that the gift-giver (in this case, the grandparent) retains control over how the money is spent or invested.
Open a 529 account
529 plans (or qualified tuition plans) are a quite popular tool for grandparents who specifically wish to help their grandkids pay for higher education. 529 plans are a great option because they allow funds to grow and compound tax-free, in addition to allowing the recipient to withdraw funds to cover qualified educational expenses tax-free. While parents may also transfer funds via 529 plans, it's especially advantageous for grandparents to utilize these plans, as assets held in a grandparent’s 529 plan do not affect the calculations for the students financial aid.
Contribute to a Roth IRA held in the child’s name
Due to the fact that there are no required minimum distributions (RMDs) for Roth IRAs, and because qualified deposits into a Roth IRA grow tax-free, opening such an account in the grandchild's name can be a great option if you want to demonstrate to them the real-world benefits of disciplined investing and saving. Read more about establishing a Roth IRA in our previous blog.
Additionally, a grandparent may name their grandchild as the beneficiary of their own Roth IRA account, which will allow the account to pass to the grandchild upon the death of the owner.
Pay their medical and/or educational costs
Another option is for grandparents to directly pay the medical or educational costs of their grandkids. There is no limit on this type of spending, however it's critical to pay the medical provider or educational institution directly.
We understand that there is no “one size fits all” when it comes to gifting the next generation, and we're here to help you identify the right course of action for you and your family. Contact Triada Advisors today to learn more about your options.