A significant shift in wealth is expected in the coming decades, with an estimated $124 trillion projected to be transferred before 2048. According to a report by Cerulli Associates, this transfer includes $105 trillion to heirs and $18 trillion to charitable organizations. Notably, around $100 trillion will come from baby boomers and older generations, accounting for 81% of all transfers. With this in mind, grandparents looking to help their grandchildren establish a strong financial foundation can engage in gifting strategies that benefit both their heirs and their estate.
Gifting to grandchildren not only provides immediate financial support but also reduces the size of an estate, potentially lowering taxes at the time of death. This approach allows grandparents to pass down values such as generosity while they are still alive. However, several factors should be considered before implementing a gifting strategy.
Key Considerations for Gifting
The age of the grandchildren plays a crucial role in determining the suitability of financial gifts. For instance, if the grandchildren are under 18, grandparents must consider when the children will be ready to utilize the funds. Additionally, evaluating the financial responsibility of the grandchildren is essential. It is important to assess whether they possess the acumen to manage the money effectively and discuss strategies to ensure the funds are used wisely.
Moreover, for grandchildren with disabilities, it is imperative to consult with an attorney who specializes in disability planning. Proper planning is necessary to prevent any adverse effects on government benefits that the child may be entitled to receive.
As of 2025, the IRS has increased the annual gift tax exclusion to $19,000. This amount can be gifted to any individual, including grandchildren, without the obligation of gift tax reporting. For married couples, this limit doubles to $38,000. Any amount exceeding these annual limits will utilize part of an individual’s lifetime federal gift tax exclusion, which is $13.99 million per person in 2025. Exceeding the annual exclusion requires filing a gift tax return to track the amounts given each year.
Educational Funding Options
Another effective strategy for grandparents is contributing to a 529 plan, which allows for tax-advantaged savings for college expenses. The assets within a 529 plan grow tax-deferred, and withdrawals for qualified college expenses are tax-free. By contributing early, grandparents can leverage compounding interest to build a substantial educational fund. For example, a $5,000 investment earning 6% annually, combined with an additional $100 monthly contribution, could grow to $20,559 in eight years and $53,584 in eighteen years.
For those looking to contribute more than the annual limit, the strategy of superfunding allows grandparents to make up to five years’ worth of contributions at once. This means a single contribution of $95,000 can be made to a 529 account for one beneficiary, effectively reducing the estate without using lifetime exemptions. For a couple with ten grandchildren, superfunding could lower their estate by $1.9 million in one day.
New regulations introduced for the 2024-2025 academic year ensure that grandparent-owned 529 plans will not impact a grandchild’s eligibility for federal financial aid, further enhancing the appeal of this savings vehicle. Additionally, if funds remain in the plan after college, a grandchild can convert up to $35,000 into a Roth IRA for future retirement, provided the 529 plan has been active for at least 15 years.
Retirement Savings and Custodial Accounts
For grandchildren who are earning income, another option is contributing to a custodial traditional IRA. In 2025, the contribution limit for individuals under age 50 will be $7,000. These funds grow tax-free until the required minimum distribution age, which will be 75 for anyone born in 1965 or later. Withdrawals can occur without penalty starting at age 59½.
A custodial Roth IRA operates similarly, allowing contributions only if the child has earned income. Once the child reaches the age of majority, they gain full control of the account. Contributions can be withdrawn without penalty at any time, while gains are subject to specific conditions for withdrawal.
Grandparents can also establish custodial accounts under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts enable grandparents to provide funds for minors while teaching them about investing. However, it is important to note that the minor’s Social Security number must be used for tax reporting. Income earned in these accounts can affect financial aid eligibility when the minor applies for scholarships.
In conclusion, gifting to grandchildren presents not only an opportunity for immediate support but also a means to instill values and create a lasting financial legacy. As families navigate the complexities of wealth transfer, it is essential to understand the implications of various gifting strategies. By engaging in thoughtful financial planning, grandparents can significantly impact their grandchildren’s futures, ensuring a stable foundation for generations to come.
Teri Parker, a certified financial planner and vice president at CAPTRUST Financial Advisors, emphasizes the importance of careful planning to align gifting strategies with individual values and financial goals. For more personalized advice, she can be contacted at [email protected].