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Three Things to Consider Before Giving Financial Gifts to Your Grandkids

It’s one of the great joys of being a grandparent: Giving gifts to your grandkids. There’s no joy quite like seeing a grandchild’s face light up when opening a gift from his or her grandparents.

In addition to holiday and birthday gifts, grandparents also sometimes choose to give their grandkids financial gifts, such as contributions to their college savings funds. There are a few things you should consider, though, before giving your grandchildren a gift like this.

Do the Parents Agree with the Gift?

Many parents have firm ideas and beliefs when it comes to teaching their children about money. So before giving your grandchildren a financial gift, you should first talk to the parents to make sure that giving the gift doesn’t conflict with their financial beliefs or practices.

For example, some parents want their children to work for their money. For younger kids, this might mean doing chores around the house to earn an allowance, while for older kids, it might mean working part-time jobs to earn spending money. These parents might object to grandparents just giving their kids money, no matter how well-intentioned the grandparents might be.

Also, parents might have long-term plans in place for major expenses like their kids’ college educations. If you discuss your gift with the parents ahead of time, they might be able to suggest that you give money toward another goal where they could use some help, like maybe helping save for a teenager’s first car.

Are There Tax Consequences to Giving the Gift?

If you give your grandchildren cash or property valued above a certain amount, you might have to pay a tax on the gift. Even if you don’t have to pay gift tax, you could end up having to file a gift tax return if you exceed this limit.

In 2021, the annual gift tax exclusion is $15,000. This means that you can give away up to $15,000 per year to any one person without having to pay gift tax or file a gift tax return. (Together, you and your spouse can give away up to $30,000 in 2021 if you file jointly.) The annual gift tax exclusion is per person, so you could give away this much to several different grandkids and not exceed the threshold.

If you give away more than this to one grandchild, you can still avoid paying gift tax by having this amount count toward your lifetime gift tax exclusion. This amount is $11.7 million in 2021, or $23.4 million if you’re married and file jointly. So if you gave one grandchild $20,000, the $5,000 that exceeds the annual gift tax exclusion would be applied to your lifetime exclusion. However, you’ll still have to file a gift tax return.

How Should You Gift the Gift?

While you can certainly just give your grandchildren cash, you might also consider giving money through an account dedicated to a specific purpose. For example, you could open a 529 account to help save for your grandchild’s future college expenses, or contribute to a 529 account if the parents have already opened one. These accounts offer tax-deferred growth that can help college savings grow even more over the long term.

An UTMA or UGMA is another potential option. These accounts are opened in the name of the grandchild but remain under the control of an adult (you or the child’s parents) until your grandchild reaches a certain age (between 18 and 21, depending on the state). Unlike 529 funds, these funds can be used for any purpose.

You might even consider contributing to an IRA for your grandchild. While it might seem a little early to think about retirement, it’s really never too soon to start putting money away for the future in a retirement account. Your grandchild must have earned income to open an IRA and you can contribute as much as your grandchild earns, up to a total annual contribution of $6,000 in 2021.

Give us a call if you’d like to discuss these and other gift-giving options for grandchildren in more detail.

 

 

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