By Lauren Teegarden
While receiving a
birthday card with a crisp bill tucked inside will still delight any child,
there are now countless ways to help your grandchild financially—including
subsidizing soaring college tuition costs, donating funds for a wedding, or
setting up a retirement savings account. As with anything else, the key is to
not act rashly: examine both your own financial situation and the money-smarts
of your grandchild before signing the check.
A Preliminary Pass
No gift should be taken
lightly, so first examine your motives and consider the possible outcomes of
your gift. Consider these questions: Do you want your grandchildren to be able
to use the money for anything, or only for college? Do you feel comfortable
giving now, or would you prefer leaving money to the grandchildren in your
will? Will you want to take an active role in managing your gift? Are your
grandchildren mature and old enough to receive such a gift? Are you financially
secure enough to provide the same-sized gift to each of your grandchildren?
Make sure that you answer these questions before proceeding.
Your Finances, First
If you want to give
money to your grandchildren, make sure that you are in a position to do so. If
not, don’t despair---your grandchildren will love you just as much, and love
for your grandchildren is certainly worth more than anything money could buy.
Make sure to secure your financial future first.
Choices, Choices
The options for giving
are numerous--- custodial accounts, joint accounts, IRAs, trusts, 529 accounts,
and savings bonds. Before deciding what the best course of action is, consult
both your own financial adviser and your own children. Work together to
understand any applicable tax laws, as well as the implications your gift might
have on future financial aid eligibility. Don’t hesitate to consult a
professional, since decisions can have long-range consequences.
One option is to give a
cash gift. Each grandparent can give up to $11,000 per year to a grandchild
without any gift tax. Once you sign the check, however, you give up all control
over your gift. It’s best to give only relatively small gifts this way, since
you never know exactly how the money will be used! Johnny could buy a car
rather than use the money for college expenses. Additionally, a grandparent can
pay college tuition directly to the school tax-free.
A second option is to
create a Section 529 Plan for your grandchild. Funds in 529 accounts are
completely tax-free at least through 2010 when used for college expenses. As
the owner of the account, you will have complete control over the money and can
change the beneficiary if you so desire. While all fifty states offer a 529
account, some are better than others. Do a little research to determine which
would be the best to enroll in—there is no requirement for state residency,
although enrolling in your own state's plan may offer you a tax benefit.
A third option is to
create an Education IRA, also known as a “Coverdell Savings Account.”
Here, you can contribute $2,000 annually toward any education costs. Tax free,
the money will belong to the recipient upon his or her eighteenth birthday. Be
careful, however, since a Coverdell Account is considered the student’s asset
and can reduce eligibility for financial aid.
Finally, consider giving
your grandchildren savings bonds. Purchased at either one-half the face value
(Series EE bonds) or at full face value (I-bonds), they accumulate interest,
and no tax is due until the bond is cashed in. Sometimes, the interest is
tax-free when used for educational expenses. Savings bonds help teach
grandchildren the virtue of patience: the longer the wait, the greater the
gain!
Final Thoughts
One final note: it is
better not to lend money to your grandchildren. If you have the financial
resources and are supportive of the situation, give a no-strings-attached gift.
If not, then have no qualms saying “sorry.” Loans can’t overcome long-standing
family tension, induce grandchildren to adopt your lifestyle, or solve personal
and career problems.
Don’t feel required by
any means to give money to your grandchildren. The advantage of giving while
you are alive is simply that you’ll get to see the benefits. (And maybe put in
a word or two if they eye that red convertible instead of college tuition
bill!)
Lauren Teegarden, a high
school senior, lives in Portland, Oregon. With grandparents of her own, Lauren
recognized the value of strong grandparent-grandchild interactions and started
"The Grandparent Connection," a free monthly email newsletter with
articles, advice, and activities for grandparents. Visit her website, www.thegrandparentconnection.org,
to sign up for the newsletter.
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