To get a head start on college savings, 529s allow you to contribute the first five years of savings up front—so, $70,000, or $140,000 with your spouse. Then, five years later, you can make another accelerated payment. “This is one of the easiest ways to get ‘chunks’ of tax-free gifts out of your estate,” Shad says.
Pay college costs directly
But a 529 plan works best if established when your grandchild is young, so the assets have time to grow. For teenagers soon to start college, you might consider writing a check for the student’s tuition directly to the university—the tuition won’t count toward your annual gift exclusion, so it offers a great way to move money from your estate without incurring taxes. Certain room and board costs (above the school’s “cost of attendance”) don’t have the same exclusion, so you might instead use gift money to cover these additional expenses.
Start a Roth IRA
Your teenage grandkids almost certainly aren’t thinking about retirement. Still, if they earn money at a summer job, for example, they’re eligible to contribute their earnings to a Roth IRA. Investment earnings in the account can compound tax-free for many decades until withdrawn—also untaxed—during retirement. You can give minor grandkids a jump on saving by establishing and using some of the annual exclusion gift to fund it for them. The annual contribution can’t exceed the amount that they earned and is capped at $5,500 for 2017.
Put your gifts in trust
A way to avoid tempting grandchildren with too much cash too early is to establish one or more trusts naming them as beneficiaries. “This is a great way to keep assets protected,” says Shad, not only from the kids’ spending the money but also from others, for instance, a divorcing spouse or a judgment in a lawsuit.
Or you could use what is sometimes called a “family bank model”—a trust created to benefit several members of the younger generations. Access to assets, controlled by an independent institutional trustee or an individual you’ve appointed, could be based on certain life events, such as having a baby. Someone who wants to start a business could ask the trustee for a loan, says Shad. A benefit to this structure, he notes, is that it could continue to help those in future generations—helping a great-grandchild, for example.