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Giving Financial Gifts to Your Grandchildren

When you feel like you've given your style-conscious granddaughter enough purses to last her a lifetime, and you can't seem to bring yourself to buy your electronics-savvy grandson yet another video game, consider dodging the decision-making by giving them the gift of money instead. While they may be more excited to open the bigger boxes under the tree, your grandchildren will appreciate the gifts in the envelopes later in life. Whether you're pitching in during a tough financial time, paying a portion of the cost of their college tuition, or just saying "happy birthday," there are several ways to help your grandchildren financially while doing it wisely.

Before you give any financial gifts to your grandchildren, it is important to understand the tax laws such gifts may fall under. The federal gift tax is calculated using a standardized rate table, but most financial gifts worth more than $10,000 fall under its domain. If you plan on giving a larger monetary gift, there are tax benefits that can make doing so easier on your bank account. If you are married, for instance, you can maximize the $10,000 annual federal gift tax exclusion by using what is known as the split-gift benefit. By combining your maximum tax-free giving amount, you can give up to $20,000 to each grandchild without having to pay the federal gift tax.

As with any financial decision, it is wise to consult with an accountant or professional planner before making any financial commitments. Once you've done so, you can feel confident and secure about helping your grandchildren monetarily.

It is probably no surprise to you that the easiest way to give money as a gift is in the form of cash. There are no strings attached, and as long as it's less than $11,000 in one year, the gift tax does not apply to it. Cash gifts are not usually considered taxable income, either, so everyone benefits.

Another way to give money is in the form of securities (more commonly referred to as stocks and bonds). But avoid giving securities that have increased in value since they were originally purchased. If you give appreciated stock, the recipient will have to pay income taxes on the total growth from the original value. According to experts, this would be like paying two taxes on the same gift, so it's best to give stocks that will increase in value in the future.

Furthermore, if you're thinking about giving savings bonds, be sure they are issued in your grandchild's name. Passing them on between family members will trigger federal income tax for you and later for whom you give them to. The same goes for investment property, such as a coin collection or a piece of land. Because these kinds of gifts have usually appreciated in value, they can trigger tax problems.

If you'd like to give a more substantial financial gift to your grandchild, one of the most popular ways is by starting a 529 plan, a state-sponsored savings plan designed specifically to help parents and grandparents finance education expenses. Many financial experts agree that this is the most effective way to save for college. If you have the opportunity to invest in your grandchild's education, a 529 plan can also offer you a nice tax benefit. Money in these accounts grow tax deferred from federal income tax and often state tax. There are no income restrictions, and more than $200,000 can be invested per grandchild. What's more, you don't have to worry about estate or gift taxes, and if the money is ever needed for something other than education costs, it can be taken out at any time for a small fee.

A Coverdell savings account is another popular way to save money for your grandchild's education. Formerly known as Education IRAs, these accounts allow an annual contribution of $2,000 toward elementary, secondary, or college education costs. Your income must be less than $110,000 if you are single or $220,000 jointly if you are married. The money in the account is tax free as it grows and it becomes the property of your grandchild when he or she turns 18.

Before you start a 529 plan, a Coverdell savings account, or any other type of savings account, be sure you, your children and your grandchildren agree on goals, understand the tax laws and consider any impact the money will have on financial aid eligibility. Working together will ensure everyone is on the same page and that everything goes smoothly.

In addition to educational needs, there are other good reasons to give your grandchildren financial gifts. Opting to give cash instead of toys on special occasions like birthdays and graduation can help them develop valuable money-saving skills and good spending habits. You may consider opening a joint savings account in both your names and letting your grandchild take part in managing it. Encourage your grandchildren to set short-term goals they can achieve by saving money, such as buying a new toy for themselves.

Aside from tax laws, there are no rules when it comes to financial giving. Whether you can afford to give a little or a lot, proper planning and a good amount of thought will help you make the best choice for your money.



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