One of the greatest joys of being a grandparent is seeing children and grandchildren successfully navigate their lives. Most everyone shares a common desire to see their family and relatives happy, healthy and financially secure. Efficiently passing resources and wealth to younger generations is one way for grandparents to achieve this goal.
Grandparents often ask me how they can lend a hand financially, while maintaining a level of control they are comfortable with. They want to help create a stable future for their children and grandchildren while also choosing what their resources are used for. With careful planning, families can accomplish the goal of financially helping future generations, minimizing the tax burden in the process and prioritizing objectives like education and health.
Below are four of the most effective tax-efficient strategies for grandparents to pass their wealth to their children and grandchildren:
Establish a trust: Trusts are a popular mechanism for transferring wealth while maintaining control and minimizing taxes. By establishing a trust, grandparents can outline specific conditions for distributing assets, such as age requirements, and place parameters around the use of the funds. Trustees can be appointed to manage the funds over time, should the grantor be disinclined to take on that role.
Tax advantages: A properly structured and funded trust can help with reducing estate taxes, while ensuring the wealth is preserved according to the grantor’s wishes.
Utilize annual gifting: The annual gift tax exclusion allows individuals to gift a certain amount of money or assets ($18,000 per person and $36,000 per couple in 2024) to any recipient of their choosing each year without incurring gift taxes. Annual gifts can be made to any number of recipients and are at the full discretion of the gift giver. The gift amounts can be changed from year to year if necessary, or stopped altogether.
Tax advantages: This strategy offers the benefit of gradual transfer of wealth over time, while reducing the potential estate tax burden. Gifting appreciated stock also removes the tax liability from the gift giver. The recipient may be subject to capital gains taxes at the rate dependent on their taxable income.
Direct payments of educational and medical expenses: Grandparents can pay for educational or medical expenses on behalf of their children and grandchildren, by paying tuition fees, health insurance premiums or medical bills directly to the educational institution, insurance company or medical facility. Educational payments must cover tuition to qualify – room and board and other college-related costs are excluded. Keep in mind that college tuition direct payments may affect the student’s ability to obtain financial aid. In this scenario, direct payment of student loan debt post-graduation is also an option.
Tax advantages: By federal law, direct payment of educational and medical expenses avoids gift taxes. Grandparents can also provide this financial support without affecting their annual gift tax exclusion.
Fund 529 college savings plans: Contributing to a 529 college savings plan is an excellent way to help grandchildren with their future education costs. Grandparents can maintain control of the accounts as the account owner and designate their grandchildren as beneficiaries. Beneficiaries can also be changed at any time if the need arises.
Tax advantages: These plans offer tax advantages, such as tax-free growth and tax-free withdrawals for qualified expenses. Grandparents can also “superfund” a 529 plan without incurring gift taxes by using the five-year gift tax averaging provision, which allows a lump sum gift equivalent to five years’ worth of annual exclusions.
Passing wealth to future generations requires careful planning and consideration of tax implications. By employing several effective strategies, grandparents can ensure their hard-earned wealth benefits their children and grandchildren for many years, providing a lasting legacy for their loved ones.