Simple strategies to take the stress out of gifting to grandchildren

Gifting assets is a great way for grandparents to impact the lives of their grandchildren. But questions about when, what, and how to gift, or what the tax implications might be, often make grandparents hesitant to act. Trust Counsel Anna Soliman provides answers to important questions to help you get started.

Q. What is an easy and simple way to gift to grandchildren?

There are several direct and easy ways to gift. One is simply to give a gift outright. You can write a check to your grandchild or even wire funds directly into his or her bank account.

One simple way to reduce your estate, especially if it is subject to estate taxes, is through outright annual exclusion gifts. The annual exclusion amount is the total one person can gift each year to another person without having to report anything for gift tax purposes. This amount is not counted against that person’s lifetime gift tax exemption. For 2024, the limit for the annual exclusion gift is $18,000 per person, or up to $36,000 for a married couple. Over time, making these annual exclusion gifts can be very simple yet powerful tax-saving technique.

Another option is to fund a trust. You can create a separate trust for each grandchild or a combined trust for all your grandchildren. This way you can direct how money is distributed over time with the help of a trustee that you appoint. There is no restriction on the type of assets or property that can be held in a trust. And trusts offer flexibility as to when a child or grandchild ultimately will receive the assets.

A third option is to create a custodial account in the grandchild’s name, called a Uniform Transfer to Minors Account or a Uniform Gift to Minors Account. The positive to these accounts is that you can contribute any amount on behalf of the account holder, and the assets can be used for any purpose. You remain in control of those assets until the beneficiary reaches the age of majority in your state. The downside is that, once the beneficiary reaches the age of majority, he or she will fully control the assets. These accounts also generally remain part of your estate until the funds are spent or distributed to the child, if you serve as custodian in charge of the account.

Q. What is a creative way to give a larger gift?

One distinctive method we often recommend is the use of an irrevocable trust for the benefit of multiple grandchildren, which can be treated like a “family bank.” The grandparents set aside funds to encourage the grandchildren to use the assets to further their interests. For example, if the grandchild has a business idea, he or she can present a business plan to the trustee, and if approved, funds from the trust can be used to start the business.

However, one issue with these trusts is that at some point, as they grow older, each grandchild may have different needs. We recommend building in flexibility with clauses that allow the trustee to evaluate distribution standards or hold back funds until beneficiaries are ready. You can also build in provisions so that the trustee has the ability to divide the trust later so that each beneficiary receives their own separate trust to be certain each ultimately is treated equally.

Q. What is the best way to gift for higher education?

A 529 plan is a good option for gifting specifically for a grandchild’s education. These are state-sponsored savings plans that can be established with the grandparent or parent as the owner and the grandchild as the beneficiary. One account would need to be created for each grandchild. The account is not considered part of your estate for tax purposes. If established early in the grandchild’s life, the assets have many years to grow (both from annual contributions and from market appreciation) before they are needed. They can be used for tuition or a range of other related educational expenses (including books, room and board, computer equipment, or any additional school fees). You also can fund a 529 plan with up to five years of worth of annual exclusion amounts at once (or $18,000 per person per year, or up to $90,000 for each child), without a tax consequence if you choose.

A primary benefit is that earnings accumulate on a tax-deferred basis. Withdrawals are tax-free if the money is used for qualified education expenses. Downsides are that the assets can only be used for education expenses, so any withdrawals not used for education purposes will incur a 10% penalty.

Also, gifts to a 529 can only be made in cash, and there are maximum contribution limits for each account, which can vary by the state sponsoring your 529 plan. If money is left in the plan after a beneficiary graduates, you can move the plan to another family member, but it still must be used for educational expenses to avoid penalty.

Q. Is there a good way to support your own children through a gift to grandchildren?

Many grandparents want to support their children by providing financial assistance through gifting to grandchildren. A common way to do this is for grandparents to directly pay tuition for school. If the tuition is paid directly to an educational institution, it will not count toward your gift tax exemption or your annual exclusion. Grandparents don't even need to file a gift tax return to report this.

It is important to be careful, however, because this gift exclusion only applies for payments made specifically for tuition. The definition of tuition is narrowly defined by law. Unlike a 529 plan, the gift exclusion does not apply for payments made for books, housing, computer equipment and other educational expenses.

Incidentally, this rule also applies for medical expenses and payments for medical insurance. If payments are made directly to the medical provider, it won't be counted against your annual exclusion or gift tax exemption.

Q. Why should I discuss wealth and gifting with my children and grandchildren?

Some people fear that having a conversation about wealth may be a de-motivator for their children or grandchildren. We’ve found, though, that when it's done in the right way, it can be a very powerful tool to teach them how to be responsible with wealth.

It’s important for grandchildren to understand the purpose of the gifts that they're receiving. For example, you should explain that the reason you created a particular trust for them is primarily to pay for schooling or medical expenses, or other reasons.

How you approach the conversation depends on your situation, your goals, and the circumstances of each of your grandchildren. Some may be more prepared to engage and understand the issues than others, so timing and life circumstances are important.