Any grandparent can tell you: it’s pretty hard to say “no” to a request from your grandkids. Whether it’s staying up late on a weekend sleepover or making one more trip to the toy store, grandparents are just naturally inclined to let the youngsters have what they want—within reason. After all, it is well known that “Grandpa and Grandma’s rules” are typically quite a bit different than the code enforced by Mom and Dad.
Many grandparents are also eager to help their grandkids get started on the right financial foot. From helping to fund their education to helping with the down payment on a first home or priming the retirement savings pump, grandparents with the means can make a big difference in the lives of the younger generations. And the other good news is that there are several ways they can do this that can also make their own tax picture a little bit brighter. Let’s take a look.
Fund a 529 education savings plan.
Each of the states offers and administers its own version of the 529 education savings plan, and one thing all the plans have in common is that growth and earnings within the plans are not subject to federal or state income taxes. Also, withdrawals from a 529 plan for qualified educational expenses are not counted as taxable income to the beneficiary or the owner of the plan. While there is no reduction in federal income tax liability for plan contributions, more than 30 states with income taxes do provide a tax deduction or a tax credit for deposits made into a 529 plan. On the other hand, gifts made to a 529 plan, whether owned by the grandparent, the student, or their parents, do reduce the size of the taxable estate. So, for grandparents with significant assets, making gifts to a 529 plan can be one estate planning tool that can be used to insulate the estate from federal estate and gift taxes.
Gift a Roth IRA.
Though parents and grandparents with significant assets or incomes are unlikely to qualify for a Roth IRA of their own because of income restrictions (individuals earning above $161,000 and couples earning above $240,000 annually cannot make qualified contributions to a Roth IRA), they can open and/or contribute to a child or grandchild’s Roth IRA, as long as the child has earned income equal to or greater than the amount of the contribution. So, if a child earned $6,000 at a summer or part-time job, the parent or grandparent can gift $6,000 (the maximum annual contribution) and deposit it in a Roth IRA in the child’s name. Not only does this move assets out of the grandparents’ estate; it also provides a valuable opportunity for the grandchild to observe first-hand the benefits of saving, compounding, and growth. Significantly, funds can be withdrawn from a Roth IRA for certain purposes other than retirement—making the down payment on a first home, for example—without incurring penalties (though such withdrawals are taxable and also subject to certain restrictions). And especially for young people with many years until retirement, the potential future growth of such an account can provide an impressive lesson in the importance of disciplined saving and investing over time. It’s a great way to get the next generations started with the “savings habit,” which is probably the most important trait for those who intend to accumulate significant wealth.
Annual gifting strategy.
Actually, both of the above strategies can be incorporated as part of a grandparent’s annual gifting strategy, which is one of the most effective tools for those who need to reduce the size of their taxable estate in order to control federal estate tax liability. In 2024, an individual can give away up to $18,000 to any individual without incurring gift tax liability. For married couples, this amount is doubled. So, suppose you and your spouse have three grandchildren. You can give each of them $36,000, for a total reduction to the taxable estate of $108,000. The funds can be placed in a trust that you design (with the help of a qualified estate planning attorney), or you can also use one or both of the above strategies to make the gift. (And by the way, let’s not forget the parents; your children can also be the recipients of annual gifts in the same amounts.) This is especially important to consider now for those with estates in the $12–14 million range, because unless Congress and the president act to extend it, the current, much higher estate tax exemption ($27.22 million for a married couple in 2024) is set to “sunset,” or expire, on December 31, 2025. A systematic annual gifting plan, coupled with the proper trusts and other estate planning documents, can be a way for wealthy couples to transfer significant assets out of the estate and reduce the amount of estate tax liability incurred by their heirs.
At Mathis Wealth Management, we know how important it is for grandparents and others to create lasting financial legacies for those they care about the most. Our fiduciary advice and guidance always puts our clients’ needs, interests, and priorities ahead of everything else. To learn more about how a gifting plan can benefit you, visit our website to read our article, “Gifting Strategies You Can Use Now.”
