If you’re considering giving money to your grandchildren for a holiday or birthday, you may be able to benefit them and also save on your tax bill.
Where to start? How much should you give, and under what circumstances or terms? Slipping the kids a few bucks may make you a popular grandpa or grandma. Just be smart and provide financial gifts that work for your family and for you.
Start at the Beginning
A good place to start is to determine if you have enough money to give financial gifts to your grandchildren. Consider how much income you have coming in, expectations for future earnings, and the potential for a serious downturn in the market or unexpected expenses that may drain your resources.
Yes, you want to help your grandkids, but take care of your needs first so you aren’t a family burden down the road. Calculate current and projected earnings from Social Security, employment income and investments.
Set an annual gift-giving limit. If your assets exceed that limit, give the kids a nice check. In those years in which your assets fail to reach your comfort limit, don’t give anything.
Talk To a Professional
Get the information you need from a knowledgeable source before making any gift-giving plans. Your local banker is a good place to start. Make sure your assets are in government-insured accounts and that your financial plans are in order.
Talk to your accountant about tax-advantaged limits on giving. There are tax benefits to giving to family – so both you and family members benefit. However, limits change under different circumstances, including how the gifts are reported to the IRS, so understand the consequences of giving the grandkids cash as a gift.
Don’t Make Promises You Can’t Keep
Keep gift-giving flexible so your finances are able to adapt to changing circumstances in your life. If you promise to give each grandchild $1,000 toward college each year, in the future that promise may come back to haunt you. Each gift should be treated as a unique occurrence with no promises of future gifts. Keep your assets flexible so they can move with markets and with changes in your lifestyle.
Give Cash Your Way
If you hand your grandkids a wad of cash, chances are that gift is going to disappear quickly. Most kids don’t understand the principles of saving and investing, so maybe you should handle how gifts are given.
Another option? State-sponsored 529 Plans for paying those tuition bills in the future. 529 plans allow you to contribute as much as you’re comfortable giving, the contribution grows tax free, and can be used for any post-secondary school tuition or other education expenses your grandkids face.
Another popular option is U.S savings bonds. They’re safe and secure, protected by the U.S.government. If you do purchase a savings bond, make sure the bond is in the name of your grandchild, not in your name.
Also consider a Uniform Gifts to Minors Act (UGMA) account. Investments in these accounts aren’t limited. However, withdrawals from a UGMA account may be taxable events – something to discuss with your accountant.
Giving cash to the grandkids? Easy, if you’re smart about it. Determine how much you can afford without jeopardizing your own future, project future expenses, and set up your gift giving to deliver the most benefit to the kids, whether it’s intended to help pay tuition or provide the start on a lifetime of prudent saving.
Spoil the grandkids a little bit if you can afford it. After all, isn’t that what grandparents do?
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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