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May 12, 2022
Once you have solidified your own retirement plan and know you have saved enough, you may find yourself wanting to help your children or grandchildren. You might want to lessen their financial burden by paying for their college, just give them a treat, or reward them for meeting various goals.
Simply giving your children or grandchildren cash is the simplest way to gift them money. Do you remember the feeling of opening an envelope with crisp bills? It is pretty exciting.
If you are in a financial situation where you want to simply give to your grandchildren in a way that they can use however they please, gifting money is a viable option. However, you should keep the federal gifting limit in mind while doing so, explains Michael Gross, CFP/CPA, and the owner of Rising Tides Financial.
The annual gifting limit in 2022 in $16,000.
“If you gift over $16,000 a year you will start to encounter gift taxes,” Gross says. “This means both you and your spouse can each give $16,000 to one grandchild and not have to pay taxes on it. If you have five grandchildren, if you and your spouse each give them the maximum of $16,000 you can really lessen the amount in your estate.”
Giving away that much money at once may sound like a bad idea, but if you have all of what you need in retirement, you can lessen your own estate taxes by gifting excess funds to your grandchildren. (Although, you have to have a lot of money to worry about federal and most estate taxes.)
Some say that the disadvantage of giving cash is that you lose control over how and when it is used. If you want your beneficiary to use the money in a specific way, you might consider a trust, custodial account, or 529 plan.
A 529 plan, or a qualified tuition plan, allows you to help save money for your grandchildren’s education. Note that funds in a 529 plan may only be used for qualified education fees.
“The money you put into this account would not be taxed whatsoever, and once it comes time for your grandchild to apply for student financial aid, this money won’t be taken into account either, which could help them receive more in financial aid,” says Gross.
Another strategy you can use with a 529 plan is to front load the account. This refers to the act of putting a large sum of money into the account at one time.
“You can make five years’ worth of payments in one year if you want,” Gross explains. “So, with the federal gifting limit at $16,000 per year, you could contribute a total of $80,000 at one time.”
Do keep in mind, though, that if you front load your grandchild’s 529 plan for five years, you can’t make another contribution until the five-year time period has passed.
You also have a couple of other options when it comes to helping grandchildren with their finances. You may open and fund accounts that you control while your grandchildren are young or until you decide to give them access.
One option is a trust.
“There are many different types of trust accounts; for example, you can choose to distribute the funds in installments or when they reach an accomplishment, such as a college degree or an income level, or some combination,” says Gross.
On the other hand, a custodial account is an account where you are considered to be the custodian, which means you have control over it until the grandchild is 18 or 21 (depending on which state you live in).
“A custodial account is similar to a savings account and the funds in it can be used for anything,” Gross points out.
You don’t want to help your children or grandchildren financially and then run out of money for yourself later on. In particular, consider your plan for covering a long term care need in the future and don’t gift unless you know you can fund your longevity.
Unfortunately, it is not uncommon to run out of money as you age. And, if you are caring for dependents it can happen quickly. Children and grandchildren that live with parents and grandparents can drain your savings. Learn more about boomerang kids here.
Before you give to grandchildren, you should assess your own retirement plans. The NewRetirement Retirement Planner makes it easy to get started with fast answers about your financial health.
Use the Planner to run a scenario where you gift money and assess your chance of success, cash flow and net worth at longevity with the gift..
Gifts can be an expression of what is important to you and financial gifts to children and grandchildren can be an opportunity to teach them about your financial values. Use the occasion to discuss why you are giving them money and how you came to the money yourself.
Talk about work, savings, investing. Maybe accompany the gift with a book like A Simple Path to Wealth, by JL Collins. (Collins wrote the book to help his daughter for life. She didn’t want to be a financial expert, so he kept things simple. People love this book. And, it delivers on the title offering simple and sane advice that is easy to implement.)
I Bonds are getting a lot of hype right now. They have a high guaranteed rate of return. The downside? Individuals can only invest $10,000 a year (and convert an additional $5,000 from your tax return, if applicable).
However, if you think I Bonds are a good investment and you are interested in gifting money to children or grandchildren, you can purchase an I Bond for them, even if you have already bought one for yourself.
You will need the recipient’s name and Social Security number to complete the purchase. And, the recipient will need to open a Treasury Direct account to hold the funds. (Or, if they are under 18, you will need to hold the account until they come of age.)
The I Bond purchase process can be cumbersome and I Bonds are difficult to track, but they are certainly popular.
Whether it is your lemon meringue pie recipe or your revolutionary war musket, why wait until after you are gone to gift these items to your loved ones?
By sharing while you are still alive, you may gain the opportunity to have interesting conversations with your child or grandchild.
Sharing your time with your grandchildren will likely ensure a greater legacy for you than giving them money.
Share what is important to you by spending time with them doing what you (or they) love.
What are their interests? And, how can you engage with them around what really matters to them?
You desire to gift your children or grandchildren may be purely altruistic. However, there can be significant tax implications and benefits of deploying your money this way. Determining the best strategies for you will depend on the details of your situation.
Gifting is a topic that is often covered by fee-only financial advisors. They can help you devise a strategy to minimize taxes while maximizing your financial opportunities. If you are interested in gifting, set up a free discovery session with a NewRetirement Certified Financial Planner®. Our advisors can help you devise the right strategies for your situation.
The NewRetirement Classroom also offers a class on gifting and charitable gifting. It is part of our year-long thematic course offering that also covers tax planning, portfolio and asset allocation strategies, building your income plan, meeting your goals for spending, stewardship, legacy, asset transfer and more. (Log into the Planner and click on “Classroom” in the left hand navigation.)
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