How to Give Monetary Gifts to Your Grandkids Without Hurting Your Own Retirement
Do you dream of paying for your grandkids’ college? I know many couples who say they want to pick up the tab for educational expenses so their grandchildren can start their own lives on solid financial footing and without the burden of student loan debt. But if you have a goal of sharing your wealth with grandchildren, do yourself a favor: Plan for it in advance so you don’t undermine your own retirement.
Here’s what I mean: I see far too many people struggle with spending their money in retirement because they’re worried that if they spend too much there won’t be anything left for their grandkids or their kids or their favorite charity. So they decide not to take the bucket-list trip to Europe. Or they abandon the idea of buying a vacation home. That’s no way to live in retirement. But if you plan for (and carve out) the money you want to share with others in advance, you’ll give yourself permission to spend your money in retirement. Planning ahead also gives you more time and more flexibility to choose the most efficient way to fund your gifting goals.
So, if you know you’ll eventually want to share your wealth with your grandkids, talk to your financial professional about including gift giving in your overall financial plan. He or she can help you:
1. Determine how much you can afford to give. Tell your financial professional what you would ideally like to gift, and then ask him or her to run different scenarios to see what can be achieved without compromising your vision for your own retirement. If your current financial plan doesn’t give you the freedom to gift as much as you’d like, your financial professional may help you identify alternative funding sources or work with you to revise your saving strategy.
2. Consider taxes as you plan your gifting strategy. The last thing you want is to weigh your grandchildren, children or yourself down with the burden of paying taxes on your gifts. So look for tax-efficient ways to be generous.
- 529 education funds: If your goal is to help fund college education, you can make contributions to a 529 plan. And while the contributions you make to the account are not deductible on your federal taxes, many states offer income tax deductions for 529 income plan contributions. In all cases, the account earnings will grow tax free and will not be subject to federal tax when used to pay for college.
- Permanent life insurance: Another way to contribute to your grandchild’s future financial security is to take out a life insurance policy on his or her behalf. There are a number of benefits to buying life insurance on a child. One of the benefits is that, over your grandchildren’s lifetime, the policy will accumulate cash value, which grows tax deferred and becomes a source of funding they can use to help pay for college, a wedding, a mortgage or their own grandchildren’s education someday. Life insurance death benefits are also generally tax free.
- Cash: You can gift up to $14,000 a year to an unlimited number of individuals tax free. Married couples can gift up to $28,000 per year. If you give more than that amount to any one person in a single year, you’ll have to report the gift to the IRS, although you won’t pay federal tax on your gifts of cash unless or until your lifetime of giving (including your estate) exceeds $5.45 million.
3. Decide if you want to place conditions on your gift. If you plan to give your grandkids an outright gift of cash, do you care when they get the money or how they spend it?
If you want to place conditions on your gift—or incent responsible behavior—you may want to consider establishing and funding a trust. An attorney can set up a trust for you that imposes any legally allowable condition on your gift. You could require, for example, that the child maintain a certain GPA in college or be fully employed by a specific age before the trust makes a distribution. Or you could think about gifting in a way that would help your grandchildren establish good financial habits. You could encourage them to set up their own Roth IRA, for example, and offer to match any contributions they make.
As you plan your gifting strategy, keep one more thing in mind: While you have every right to share your wealth in whatever way you choose, be respectful of your grandchildren’s parents. At the very least, make them aware of your intentions so they know what to expect and can plan accordingly. If you’re going to pay for their child’s college tuition, for example, they won’t want to make contributions to a 529 plan that can be used only for education.
By planning in advance, you’ll be giving yourself the freedom to enjoy two of the most rewarding aspects of grandparenthood: seeing your grandkids start life on solid financial ground and living the life you envision with them.