When a grandchild joins the family, grandparents naturally want to see them have the best upbringing possible. Part of this can include cash in the birthday cards or checks in the stockings – however, for larger gifts there are better ways to give all while minimizing taxation to both grandparent and grandchild. This article reviews some ideas on simple and smart ways to give gifts to your grandchildren.

529 Plans

529 plans are a great option to gift money intended only for college tuition purposes. College savings plans invest after-tax contributions (like a Roth IRA) in mutual funds so that while the child grows, so does the original gift. While it’s great to ensure that the money will only be spent for schooling, be wary of investing too much in a 529 in the event the child decides that college isn’t for them, meaning that the funds may be penalized and charged income tax if withdrawn.

UGMAs or UTMAs

“Universal Gifts to Minors Act” or “Uniform Transfers to Minors Act” accounts allow individuals to transfer financial assets to minors without establishing a trust. When the minor reaches the age of majority in their state, the funds are then under their custody. Withdrawals may be taken while the child is still a minor as long as it will be used for the child’s benefit. The income from these accounts is sheltered and is tax free up to $1,100, while the next $1,100 is taxed at the child’s rate of 10%, with the remainder being taxed at the parent’s tax bracket.

Paying Medical and Tuition Costs Directly

When a grandparent pays for medical or tuition costs directly, it’s always a nontaxable event. This is arguably the most simple way to gift to a grandchild, with the added benefit of not using any gift exemptions.

Irrevocable Gift Trusts

Irrevocable gift trusts take advantage of annual tax-free gift limits by allowing donors to give to the trust tax free with designated beneficiaries who may take their tax-free gifts as distributions later down the road (provided that the donor does not give any other gifts to the individuals exceeding $15,000 in total for the year) and avoid estate tax after the donor’s death. The potential downside to this strategy is that once the money is contributed to the trust, it cannot be rescinded by the donor or withdrawn in any other way than what the trust document sets forth.

Regardless of the method, gifts to grandchildren are meaningful and have the power to ensure a child is set up for success. Gifting is one small piece of the wealth planning puzzle and the methods above should be considered in conjunction with the individual’s bigger financial picture.

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