Last Updated on February 14, 2024 by Tresi Weeks
Gifting money to your grandchildren can do more than help your descendants get a good start in life — it can also reduce the size of your estate and the tax that will be due upon your death, and is thus a very useful tool to include in your estate plan.
Methods for gifting assets to grandchildren
Weeks Law Firm handles all areas of estate planning, trusts and related matters. In our experience, gifting assets to grandchildren is not just an act of familial care but also a wise financial decision. We often hear the question: “How much can I gift my grandchildren – and how should I do so? “Here are some of the best ways for grandparents to give money to grandchildren.
Can grandparents give money to grandchildren tax-free? Yes, this is indeed possible. Perhaps the simplest approach to gifting is to give the grandchild an outright gift. You may give each grandchild up to $16,000 a year (in 2022) without having to report the gifts. If you’re married, both you and your spouse can make such gifts. For example, a married couple with four grandchildren may give away up to $128,000 a year with no gift tax implications. In addition, the gifts will not count as taxable income to your grandchildren (although the earnings on the gifts, if they are invested, will be taxed). Just remember that any gift can interfere with Medicaid eligibility.
But you may have some misgivings about making outright tax-free gifts to grandchildren. There is no guarantee that the money will be used in the way you may have wished. Money that you hoped would be saved for educational expenses may instead be spent on a fact-finding mission to Fort Lauderdale. Fortunately, there are a number of options to protect against misuse of the funds by grandchildren:
You can pay for educational and medical costs for your grandchildren. There’s no limit on these gifts, meaning that you can pay these expenses in addition to making annual $16,000 (in 2022) gifts. But you have to be sure to pay the school or medical provider directly.
You can make gifts to a custodial account that parents can establish for a minor child.
You can transfer money into a trust established to benefit a grandchild.
You can reduce your taxable estate while earmarking funds for the higher education of a grandchild through the use of a “529 account.”
You can use other gift vehicles like IRAs and savings bonds.
To determine the best way of gifting money to grandchildren, as well as managing all other aspects of your estate planning, the best thing to do is discuss your questions and concerns with your estate planning attorney. With their help, you can devise the wisest and most beneficial plans for passing assets on to your descendants.
FAQs
You can make gifts to a custodial account that parents can establish for a minor child. You can transfer money into a trust established to benefit a grandchild. You can reduce your taxable estate while earmarking funds for the higher education of a grandchild through the use of a “529 account.”
What is the best way to leave inheritance to grandchildren? ›
A trust can also be an effective tool for transferring assets to an adult grandchild, while reducing estate taxes and allowing your influence on the assets even after you have passed away.
How do I put money away from my grandchildren? ›
Legacy Financial Advisors' Kathryn Amorello has several suggestions for the best ways to support your grandkids.
- Contribute to a 529 plan. ...
- Write them into your will. ...
- Make them your life insurance beneficiary. ...
- Arrange to cover your estate taxes. ...
- Gift money. ...
- Do your research. ...
- Consider a trust.
What is the best savings account for grandchildren tax-free? ›
Like a 529 plan, a Coverdell education savings account (ESA) allows you to invest money, use it for qualifying college or K-12 expenses and pay no taxes on gains. You can open a Coverdell ESA at brokerages and other financial institutions for minor grandchildren.
How do I transfer wealth to grandchildren? ›
6 Ways to Pass Wealth to Your Children and Grandchildren
- 401(k)s and IRAs. These grow tax-free while you're alive and will continue tax-free growth after your beneficiaries inherit them. ...
- Taxable accounts. ...
- Your home. ...
- Term life insurance. ...
- Whole life insurance. ...
- Annuities.
How much money can you gift to your grandchildren? ›
So, how much can you gift to your grandchildren tax-free? Each grandparent can gift up to £3,000 in any one tax year, exempt from IHT. If the whole £3,000 is not used in any single tax year, the balance can be carried forward to the next tax year.
How to leave grandkids your retirement savings -- and not a huge tax bill? ›
If you are interested in leaving a smaller amount of money and are not overly concerned with how quickly it is used, 529 plans or UTMA accounts are a good option. You could set up a college savings plan for your grandchildren using a 529 plan. Another option is to leave your IRA to your children.
Can I put money away for my grandchildren? ›
While grandparents can pay into accounts such as a junior Isa or junior Sipp, you usually have to be a parent or legal guardian to open one. The exception could be a junior investment account. In such an account, assets are held in trust for a child until they turn 18.
Is it better to give kids inheritance while alive? ›
Give now or later: The IRS doesn't care
For tax purposes, the timing of your generosity makes little difference if your family is not likely to be subject to estate taxes. The U.S. tax code makes it fairly easy to give your children money, stocks or other investments or a piece of the family business.
Are cash gifts to grandchildren tax deductible? ›
In 2023, you could gift anyone up to $17,000 per year tax-free—this is known as the annual gift tax exclusion and is set each year by the IRS . You won't have to pay a gift tax on funds at or below this amount, and it won't add to their taxable income. This amount is per grandchild.
Inheritances usually go to grandchildren.
Many grandparents attempt to pass down generational wealth to their grandchildren, but not everyone can save enough money.
What is the best savings account for a grandchild? ›
If you're looking to save money for your grandkids, at the moment, Junior ISAs generally offer the best return, plus they have tax-free advantages. Junior ISAs and other options are available from brands like Moneyfarm, Interactive Investor, Hargreaves Lansdown, and &me.
Can a grandparent set up a bank account for a grandchild? ›
Depending on the type of savings account, a grandparent can open a savings account for their grandchild. In most cases, you'll need to provide the child's birth certificate to set up the account, though the documentation required will depend on the account provider.
Can a grandparent open up a bank account for a grandchild? ›
You can open a savings account for a grandchild today
Savings accounts for grandchildren can help support the next generation, as well as their parents, while also teaching your grandchild about the value of money. Open an online savings account for your grandchild today to help prepare them for financial independence.
Which grandparent should invest the most in grandchildren? ›
Maternal grandparents and maternal grandmothers (MGMs) in particular consistently show the highest levels of investment (e.g. time, care and resources) in their grandchildren.
How much can a parent gift a grandchild tax-free? ›
Annual gifting exclusion limits
This is known as the annual exclusion. For 2024, the annual limit per recipient is $18,000. In other words, you can give up to annual limit per grandchild without worrying about tax implications or filing a gift tax return.
How do I legally gift money to my family? ›
You must submit a gift tax return if you present more than $15,000 in cash or assets (for example, stocks, land, or a new automobile) to any one individual in a year. This condition does not imply that you must pay a gift tax. It simply means that you must complete IRS Form 709 to report the gift.
What kind of account is best for grandchildren? ›
What Type of Savings Accounts Can You Open for a Grandchild?
- Traditional Savings Accounts. Traditional savings accounts are popular options for grandparents looking to start their grandchildren on the path toward saving money. ...
- Certificates of Deposit (CDs) ...
- Custodial Accounts. ...
- 529 Education Accounts.