Learn how you can make the biggest impact in your grandchild's life by ensuring they get the most benefits possible from your assets.
For many grandparents, one of the perks of growing old is getting to share assets with those they love – especially their grandkids. It’s quite common to hear about the grandma who slips twenties to her grandson or the grandpa who gifts stocks or bonds to a granddaughter. These assets can not only help to teach your grandchild the importance of saving and managing money but also may put a dent in some of their biggest expenses, such as college or a car. However, there are often certain tax implications when gifting wealth to a relative, even a young one, leading many grandparents to ask, “How do I leave my assets to my grandchild?” To hear more, keep reading as we tackle this complex topic.
Whether you’re planning to distribute your assets after you’re gone or want to start helping out your grandchildren now, you have plenty of ways to leave those assets. Depending on what you choose, the funds could be made available when a grandchild turns 18, when they go to college, or at any point later in life. The following are some of the top options for grandparents looking to leave their assets to a loved one:
Although they’re frequently associated with great wealth, trusts are tools that can benefit families of almost every background. A trust is essentially a pool of assets set aside for a beneficiary or beneficiaries and run by someone you trust; it could be a friend or a family member. This person works to ensure that the funds are used in whatever way you’ve specified, whether that means saving them for college or waiting to disburse the money until your grandchild has reached a certain age.
Among the many types of savings plans designed specifically for education, 529 plans stand out for their unique tax benefits. Opening a 529 plan for a grandchild will let you make contributions that will be invested in whatever portfolio you’ve chosen, generating gains over the years until your loved one heads off to school. Unlike other types of investment accounts, 529 plans grow free from federal (and usually state) income tax, so every dollar you earn with your account can be used to cover tuition, fees, and other education-related expenses.
Of the options listed here, UGMA and UTMA accounts are probably the simplest. They are examples of custodial accounts, meaning that you’ll open the account in your grandchild’s name and deposit your assets, then retain control of the account as custodian or appoint someone else to fill that role. However, the beneficiary of a UGMA/UTMA account gains control over those assets when they come of age – either age 18 or age 21, depending on the state – so you may not be able to choose how the money is spent.
While every option listed here or elsewhere is bound to come with its own share of pros and cons, 529 plans represent arguably the best option when it comes to providing your grandchild with an education for a number of reasons.
Firstly, you’ll be able to guarantee that the funds get where you intend them to go: covering the cost of higher education. Depending on the 529 plan, the money could be used to pay for tuition, computers, fees, books, and even room and board. This could make a big dent in the final cost of college for your grandchild, leading to less student debt once they graduate.
Secondly, you can free up some of the assets in your estate, removing them from the equation when the federal estate tax comes due. In essence, your estate would be getting a tax break for contributing money to your grandchild’s future.
Finally, although the account will be in your grandchild’s name, you’ll retain control over the funds at all times as the account owner. This doesn’t just mean directing funds to your grandchild’s education, either; you’ll be able to withdraw money from the account at any time, though doing so for anything other than a qualified education-related expense will incur federal income tax on the earnings in the account, plus a 10% penalty.
For those who wish to leave their assets to their grandchild after passing away, these same benefits still apply; all you’ll have to do is name a secondary account owner who will take over management of the funds when you’re gone.
There is, however, one potential drawback to 529 plans that any grandparent should be aware of: they can affect your grandchild’s financial aid eligibility if used incorrectly. Paying for tuition or room and board out of the account will be considered income for your grandchild, affecting the need-based calculations of aid used by the federal government, but there are ways around the problem.
Because the two most recent years are not taken into account, saving the payments for your grandchild’s junior or senior year means they won’t factor in; alternatively, you could use the money to cover student loan payments, though there is a $10,000 cap on payments of this kind.
Like any other financial decision, choosing how to leave your assets to your grandchild is will require careful consideration. Everything from your personal financial situation to the unique needs of your children and grandchildren is certain to play a role in the process, but 529 plans deserve a spot on the shortlist. Learn more about the benefits of 529 plans by visiting us online or download the free Sootchy app to open, manage, or contribute to a plan at the touch of a button.