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5 Ways to Gift Money to Your Grandchildren

POSTED ON: February 16, 2021

grandchild and grandparent

The relationship between a grandparent and a grandchild is a very special one. As a grandparent, you want to do what you can to give your grandchild a good life. Many grandparents want to give money to their grandchildren to help them in one way or another. The good news is that giving away the money also helps reduce the size of the grandparent’s estate and the tax that will be due upon their death.

5 Ways to Gift Money

If you’re thinking about gifting money to your grandchild, it’s a good idea to talk to a knowledgeable Massachusetts estate planning attorney. Here are some options:

1. Give cash

Of course, this is the simplest way. You may give up to $15,000 a year to each grandchild in 2021 without having to report the gifts or being affected by any federal tax consequences. For married couples, that holds true for each partner. And they can give that amount to as many grandkids as they want. So, if Stan and Mary have three grandkids, they could give away $90,000 to their grandkids in 2021 and not incur any gift tax consequences. The gifts won’t count as taxable income to their grandchildren.

One issue with giving a cash gift is that the gift might not be used in the way you intend. Perhaps you hoped the money would be used for the child’s future education, but they choose to purchase a trip or a car with it. 

2. 529 plans

You could choose to put the money into a 529 plan, which covers the cost of higher education. Contributions to 529 plan funds are tax-free. They’re invested in mutual funds so they have the potential to grow. As a state-sponsored investment plan, the state coordinates with an asset management company to handle the investment according to the state’s plan features.

Contributions to Massachusetts 529 plans of up to $1,000 per year by an individual, and up to $2,000 per year by a married couple filing jointly, are deductible in computing Massachusetts taxable income.

3. Custodial accounts

Custodial accounts are used to hold and protect assets for minors until they reach the age of majority, which is 21 in Massachusetts. The creator of the account (usually a parent or grandparent) designates a custodian to manage the minor child’s account. The custodian can withdraw money to pay for legitimate needs of the child. These accounts typically allow stock, bond, and mutual fund investments. The UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are custodial accounts that people often consider for college savings.  

4. Savings bonds

These are issued by the U.S. Treasury Department in order to fund government activities. The money you pay for a savings bond represents a loan to the U.S. government. The savings bond can continue to earn interest for up to 30 years. After 12 months, the savings bond can be redeemed for its face value, plus any interest it has earned. If the bond is redeemed before it’s five years old, you’ll forfeit the interest from the last three months.

5. Wills and trusts

You can also gift money in a will and/or trust. A major advantage of using a Massachusetts trust is that it can easily be personalized to meet your needs. For example, you could decide to give a certain portion of the assets to the beneficiary at certain ages. One scenario would be to distribute 25% of the assets to them at the ages of  21, 25, 30, and 35.

There’s a lot to think about when gifting assets to your grandchildren. First, make sure you keep enough assets for your own living expenses. You also need to consider if your grandchildren can wisely manage the money now or if a structured approach better, and what are the tax implications or tax savings for each type of gift. As an experienced estate planning lawyer in Massachusetts, Matthew, Karr, Esq., can help you evaluate the pros and cons of your options, so you choose the best ones for your situation. Contact us at 617.299.6976 or now to schedule your free consultation.