Regardless of net worth, grandparents often ask me how to effectively benefit the coming generations. It’s certainly more fun to see your gift in action vs leaving behind an inheritance. Therefore, the question is usually positioned in terms of annual gifting, but it doesn’t have to mean that. Today, I write about how a grandparent can financially help the next generation.

For Grandparents with Deep Pockets

Setting up 529 plans early is a great way to help your children fund education goals for grandchildren. 529 plans have even been expanded for use at private elementary and high school. But keep in mind these accounts have the most dramatic impact for funding college given the longer runway for investments to grow tax-free. You can easily contribute annual exclusion gifts to 529 plans or make a larger contribution of 5-years worth of annual gifting. Annual exclusion gifts are currently $16,000/yr per person in 2022. 

The benefit of 529 plans are their tax efficiency. While no deduction is received on the federal return, investment gains are tax-free if funds are used for qualified educational expenses. Given the cost of private education can be a real budget-buster for working families, this is an amazing way to help the next generation and beyond. It’s also a great way to reduce your taxable estate, especially if you’re in Massachusetts where a state estate tax is triggered at $1,000,000. Your home alone could trigger the state estate tax, which doesn’t just tax everything above $1,000,000, but triggers a progressive tax on your entire net worth.  

Another option is to contribute toward daycare expenses. Again, grandparents can make annual exclusion gifts of $16,000 per person per child. For example, if you’re a couple with two grandchildren, you can make a combined gift of $32,000 ($16,000 x 2) to each grandchild, totaling to $64,000 a year in gifts. Annual exclusion gifts do not have to be reported to he IRS, which means avoiding the hassle of a filing a gift tax return. 

If you have older grandchildren where college funding has been met but they’re still relatively young, consult an estate attorney to create an Irrevocable Trust. This creates a new bucket to hold your annual exclusions gifts but can provide some parameters on how and when the funds are used or inherited. For example, if you have a 15 year old grandson you may feel reticent to hand over $16,000-$32,000 a year directly. And even adding it in a UTMA account (an account intended for minors) will immediately turn over at the age of majority (typically age 18-21). Potentially you want to make annual gifts but not have the funds accessible to your grandson until he reaches age 30. Or 50% at 25 with the remainder at age 30. At that point, he could use the funds to hopefully make a downpayment, start a business, or take some time off work to focus on family.  A trust can accomplish this, and also create protections against creditors and divorce.

Lastly, medical bills are known to sink families financially. If you have a child or grandchild suffering from a medical condition, paying the hospital bills directly can be an excellent way to benefit the next generation. Paying directly also doesn’t limit you to the annual exclusion thresholds. Similarly, if you have a child or grandchild with a disability, gifting to a supplemental needs trust or ABLE account could be a great way to support your family without disqualifying them from receiving community benefits.

For Grandparents that are comfortable – but not extravagantly so.

So many Powwow grandparents land in this category – having enough wealth to live comfortably, but the idea of making significant gifts right now is a bit terrifying. If the market does average or well, things look great. But a consistently bad market, extreme longevity, or higher than expected expenses have you projected to need every last dollar available. So while I can likely show a safe amount to start gifting, it’s still mentally difficult to write the check. That’s totally OK! And I certainly encourage prioritizing retirement and elder care before discretionary gifting. 

What to consider in this situation is two-fold. First, consider gifting consistently smaller amounts or only committing to short-term expenses. For example, covering the cost of plane tickets to visit, the cost of camp for a grandchild, back-to-school shopping, making a single annual exclusion gift to the family vs to each family, paying for shared services (ie – cell phone family plans, streaming services, shopping memberships). Smaller service style gifts are easier to work into a budget and larger as-needed gifts put you in a position to re-evaluate an amount you’re comfortable with each year. 

Second, revisit the idea of larger gifting and college funding down the road. Potentially you’re a new grandparent at the age of 70. That means baby will be headed to college when you’re 88. You have to admit that the variables for retirement and elder care narrow and firm up considerably by the age of 88!  At that point in time, you may feel much more comfortable paying toward college, but at this point directly vs into a savings fund. And when paying the college directly, you do not have to worry about annual exclusion limits. It’s much easier to make up for lost time if you realize that at age 88 you can reasonably part with $100,000. Payments made directly toward college and medical expenses have no IRS reporting requirements. 

For Grandparents on a fixed income.

This makes me think of the Seinfeld episode when Jerry unintentionally overdrafts his Nana’s account by cashing a backlog of annual birthday checks she wrote to him over the years. When mentioning it to his family they start screaming… “she’s on a fixed income!!!!” 

Some grandparents are just making ends meet and longevity/health is a huge worry. Gifting in this situation certainly doesn’t make sense. But if you’re still wanting to make a financial impact on the next generations, there are few things to consider. 

First, your time is extremely valuable. Helping with childcare can equate to big savings for your children, and allow that much more to be saved. Even if the grandkids are beyond daycare, helping with school monitoring, PTO, pick-ups, extracurricular, weekend babysitting – anything – is truly a huge help financially. It may allow parents to work an extra shift, remain full-time, or keep a part-time job. Also, PTO and other requested volunteer duties usually means spending time or writing a check. So again, your children not having to take time off work to be school monitor or write a check makes your time in retirement extremely valuable.

Second, your memories and abilities are priceless. Educating the next generation  on the family’s history, helping document the present, and passing along your skills/hobbies/interests are all the makings of cherished memories and tradition. 

Third, countless families I’ve worked with don’t want or expect a dime from their parents/grandparents. They only wish that their parents manage their finances well enough to cover their eventual retirement and care needs. To the extent that unravels, it can mean huge financial consequences to your children/grandchildren in terms of taking time off work during peak earning years to provide care that can’t otherwise be afforded.  Spending reasonably, living healthfully, and leaning into community resources as needed can ultimately be the best gift you could ever give.