I love being a parent… well, most of the time. But my parents – and my wife’s parents – tell me there is nothing better than being a grandparent, and the joy they feel about their grandchildren comes with no interruption. And I get it. After all, they get to spoil my kids and focus on connecting with them while leaving all the heavy lifting to my wife and me.
The fact is, many grandparents who enjoy financial freedom are often more than generous to their grandchildren. And some even want to see their grandchildren enjoy an inheritance now instead of waiting to pass along assets after they are gone. If that’s you, consider these 7 points before you make gifts to your grandchildren.
Clarify the gift. Most grandparents make outright gifts with no strings attached. But if you intend to provide a loan or an advance on an inheritance, you should always clarify that in writing.
Equal treatment. It is not unusual for a grandparent to be closer to some grandchildren than others, but when gifting assets, unequal treatment among grandchildren will almost certainly lead to family resentments. Even if you give more to some than others during your life, consider treating all grandchildren equally in your estate plan.
Taxes. With the federal gift tax threshold at $5.34 million (double that for married couples), most people won’t have to worry about paying federal gift taxes. However, any gift to an individual that exceeds $14,000 each year ($28,000 for married couples) must be reported on a gift tax return.
Education. You can help with a grandchild’s college tuition by making payments directly to their educational institution. That doesn’t have to be reported. And there is no limit on these contributions. Investing in a 529 plan for each of your grandchildren is also a great way to help them (and their parents!) save for college, building a tax-deferred account that will never be taxed as long as it is used for educational purposes.
Your own needs. It’s tempting to be overly generous in making gifts to grandchildren, but you should not give to the detriment of your own needs. Finding the right balance will help ensure your children and grandchildren don’t have to support you because you gave too much to them.
Long-term care. Chances are that you will need some kind of long-term care at the end of your life, research shows that most of us will. If you can’t afford long-term care and need help, any gift of assets you have given could make you ineligible for Medicaid benefits for five years.
Consider a trust. There are many reasons why you should not give gifts of cash or assets to grandchildren, some that you may not even be aware of. Lots of cash could be fuel on the fire of bad behavior or undermine your own children’s goals for their children. To make a lasting gift, consider using a trust that will pass assets along to grandchildren safely and protect those assets for their entire lifetimes from bad behavior, bad credit, and even bad marriages.
I see how much my kids love their grandparents. And there’s no doubt, the relationship between grandchildren and grandparents is something special. If you are a grandparent, with just a little planning you can deepen that relationship and have an even greater impact on the lives of your grandchildren.