Sure, grandparents love buying ice cream cones and carousel rides for their grandchildren, but most with the resources eventually decide that they want to do something bigger, something that will make a difference in their grandchildren's lives. Then they face the decision of how to give money to their grandchildren. This is not a decision to be made lightly. Unless grandparents have considerable fiscal acumen, they may need to consult with a financial planner.
But here's a quick tour through the options available.
Giving Money Outright
Some grandparents want to enjoy the results of their gifts. These grandparents prefer giving money outright, so they can see their grandchildren enjoy it. Currently grandparents can give up to $14,000 a year per grandchild without having to pay gift tax.
The problem with outright gifts is that many children lack the ability to spend money wisely. One solution is to put the money in a custodial account and name another individual -- usually a parent -- to control it. The rub there is that some parents aren't wise managers either. Another complication is that the money will pass to the grandchild when he or she reaches the legal age of majority, which is 18 in most states, at which point the money can be spent for anything.
Paying for Experiences
Some grandparents choose to pay for camp, a cruise, a trip or other experience for grandchildren or even for the whole family.
"I'm spending your inheritance," such grandparents sometimes declare, but many families love this form of gifting. Grandchildren get to have experiences they wouldn't have otherwise, and the grandparents get to see them enjoy it. Such expenses count against the $14,000 gift allowance, though, so grandparents who want to do both should plan accordingly.
Paying for Medical Care or Tuition
It's not as glamorous as a trip abroad, but many grandparents can also cover medical or dental expenses and private school tuition. Some also pay for health insurance. These expenditures do not count toward the gift allowance as long as the money is paid directly to the providers. .
Other Vehicles for Transferring Money
Savings bonds are still around, although they don't look much like they used to. Savings bonds are no longer issued as paper but are sold in electronic form. Now you can put any amount of money in a savings bond rather than being limited to specific denominations. Savings bonds have lost favor in recent years due to bad performance in inflationary periods, but some still use them for security's sake. They are also one of the few types of securities that minors can hold in their own names. In addition, tax benefits are available on some bond proceeds when used for qualified education expenses. Get more information about savings bonds from the Securities and Exchange Commission (SEC).
Zero coupon bonds are bonds that are bought at a deep discount and reach their full value at maturity, usually after five, ten or fifteen years. Some grandparents like to gift grandchildren with zero coupon bonds that will mature at a specific time, such as the year they graduate from high school.
The U.S. Treasury issues zero coupon bonds, but so do corporations and other governmental entities. The SEC also has information about zero coupon bonds.
Giving stock to grandchildren is also a possibility. If you own stock that has appreciated considerably, you may benefit by giving it to grandchildren, who will not have to pay as much tax on the capital gains. Of course, you can also buy stock to give to grandchildren, either by buying shares direct or purchasing them through a custodial account at a brokerage house. Some brokerage firms offer special deals for custodial accounts.
Paying for College
The majority of grandparents who set aside money for their grandchildren intend that it should be used for college. With costs high and rising, however, grandparents should evaluate their own financial situation carefully before committing to pay for most or all of a college education.
Although many of the above gifting methods can be used to pay for college, there are also some special means of paying for a grandchild's college. Possibly the most popular is a 529 plan, for its flexibility and tax benefits. The money placed in a 529 still belongs to the grandparent and can be switched to a different grandchild if need be, or reclaimed by paying a 10% penalty. Grandparents need to be aware of how a 529 will affect a grandchild's financial aid package.The short answer is that the account itself won't be counted, but disbursements during one year will be considered when creating a financial aid package for the next year. It may be wise to defer payments until the grandchild's senior year, if graduate school is not in the plans, because there will be no future financial aid package to be impacted.
A Coverdell Education Savings Account, previously called an Education IRA, is another possibility. This strategy offers the tax benefits of regular IRAs, but only $2,000 per child per year can be invested, and the account is transferred to the child when he or she comes of age. Also, grandparents with incomes in six figures face reduced access to this plan, or may be ineligible altogether.
No Strings Attached
Maybe you've been teaching your grandchild about money from an early age. If so, kudos to you. Still, there are no guarantees that such lessons will stick.
Before you give any substantial amount to a grandchild, know what kind of giver you are. If you will be upset if the money you give is not used wisely, stick to those methods that allow you the most control. Once the money is in a grandchild's name, trying to direct how it is spent or criticizing your grandchild's decisions will only cause hard feelings. And that would make the cost of the gift far too high.
A possible alternative is to leave grandchildren a bequest when you die. Learn more about willing money to grandchildren and other end-of-life planning that grandparents should consider.