Grandchildren: the financial guide
How to translate your love for these newest family members into tangible support for their financial future
From the moment your grandchildren are born through the thrill of watching them grow up, while your first instinct is to hug and kiss, a close second may be to do whatever you can to give them a financial head start in life.
“That’s what comes up right away when we do financial planning with a newly minted grandparent,” says William Shad, a UBS Wealth Management Consultant based in Wellesley, Massachusetts.
One of the simplest and most effective ways to build substantial funds for a grandchild’s long-term needs is to use the annual gift tax exclusion. For 2017, you can give up to $14,000 to as many people as you like without paying tax. Have your spouse make a gift too, and that’s $28,000 a year for each grandchild.
Grandparents might put those gifts into a custodial investment account, established under the Uniform Gifts (or Transfers) to Minors Act—usually known as UGMAs or UTMAs. Yet this approach has a serious drawback: When your grandchild reaches age 18, the age of majority in most states, he or she gets immediate access to those assets—whether they’re prepared to make good financial decisions or not. “You may want to put a little money into custodial accounts, so they’ll have a small nest egg when they go off to college, but don’t overdo it,” Shad suggests. If you want to exercise a bit more control over how the money is used, there are other options to consider, Shad says.
Key takeaways:
- Grandparents have a natural desire to support their grandchildren financially.
- To help grandchildren without paying federal gift tax, start by using the annual exclusion amount of $14,000 per spouse (in 2017), gifted to each grandchild.
- In addition to direct gifts, consider state-sponsored 529 college savings plans, paying for college directly, starting a Roth IRA, if the child has earned income, or putting gifts into a trust.
- Speak with your Financial Advisor about which approach or combination of approaches can maximize the benefits for your grandchildren.
- Your Financial Advisor can set up a family forum so that everyone is on the same page.
Create a 529 college savings plan
State-sponsored 529 plans are popular for good reason. You could create one for each grandchild, using your own and your spouse’s annual exclusion to fund it each year. Investment earnings in the account aren’t taxed, and distributions to pay the beneficiary’s college expenses are also tax free. And, unlike with UGMAs and UTMAs, you control the account and funds can only be used for higher education.
