Maximize Your Money:
Passing Money to Your Grandchildren the Smart Way
By Lauren Teegarden
While receiving a birthday card with a crisp bill tucked inside will still delight any child, there are now countless ways to help your grandchild financially—including subsidizing soaring college tuition costs, donating funds for a wedding, or setting up a retirement savings account. As with anything else, the key is to not act rashly: examine both your own financial situation and the money-smarts of your grandchild before signing the check.
A Preliminary Pass
No gift should be taken lightly, so first examine your motives and consider the possible outcomes of your gift. Consider these questions: Do you want your grandchildren to be able to use the money for anything, or only for college? Do you feel comfortable giving now, or would you prefer leaving money to the grandchildren in your will? Will you want to take an active role in managing your gift? Are your grandchildren mature and old enough to receive such a gift? Are you financially secure enough to provide the same-sized gift to each of your grandchildren? Make sure that you answer these questions before proceeding.
Your Finances, First
If you want to give money to your grandchildren, make sure that you are in a position to do so. If not, don’t despair---your grandchildren will love you just as much, and love for your grandchildren is certainly worth more than anything money could buy. Make sure to secure your financial future first.
The options for giving are numerous--- custodial accounts, joint accounts, IRAs, trusts, 529 accounts, and savings bonds. Before deciding what the best course of action is, consult both your own financial adviser and your own children. Work together to understand any applicable tax laws, as well as the implications your gift might have on future financial aid eligibility. Don’t hesitate to consult a professional, since decisions can have long-range consequences.
One option is to give a cash gift. Each grandparent can give up to $11,000 per year to a grandchild without any gift tax. Once you sign the check, however, you give up all control over your gift. It’s best to give only relatively small gifts this way, since you never know exactly how the money will be used! Johnny could buy a car rather than use the money for college expenses. Additionally, a grandparent can pay college tuition directly to the school tax-free.
A second option is to create a Section 529 Plan for your grandchild. Funds in 529 accounts are completely tax-free at least through 2010 when used for college expenses. As the owner of the account, you will have complete control over the money and can change the beneficiary if you so desire. While all fifty states offer a 529 account, some are better than others. Do a little research to determine which would be the best to enroll in—there is no requirement for state residency, although enrolling in your own state's plan may offer you a tax benefit.
A third option is to create an Education IRA, also known as a “Coverdell Savings Account.” Here, you can contribute $2,000 annually toward any education costs. Tax free, the money will belong to the recipient upon his or her eighteenth birthday. Be careful, however, since a Coverdell Account is considered the student’s asset and can reduce eligibility for financial aid.
Finally, consider giving your grandchildren savings bonds. Purchased at either one-half the face value (Series EE bonds) or at full face value (I-bonds), they accumulate interest, and no tax is due until the bond is cashed in. Sometimes, the interest is tax-free when used for educational expenses. Savings bonds help teach grandchildren the virtue of patience: the longer the wait, the greater the gain!
One final note: it is better not to lend money to your grandchildren. If you have the financial resources and are supportive of the situation, give a no-strings-attached gift. If not, then have no qualms saying “sorry.” Loans can’t overcome long-standing family tension, induce grandchildren to adopt your lifestyle, or solve personal and career problems.
Don’t feel required by any means to give money to your grandchildren. The advantage of giving while you are alive is simply that you’ll get to see the benefits. (And maybe put in a word or two if they eye that red convertible instead of college tuition bill!)
Lauren Teegarden, a high school senior, lives in Portland, Oregon. With grandparents of her own, Lauren recognized the value of strong grandparent-grandchild interactions and started "The Grandparent Connection," a free monthly email newsletter with articles, advice, and activities for grandparents. Visit her website, www.thegrandparentconnection.org, to sign up for the newsletter.