Grandchildren can be a source of joy for many. Some grandparents feel an urge to provide for their grandchildren through gifts. However, there are factors to consider before giving significant gifts to grandchildren.

First, it is always important to make sure your own needs are taken care of first. The short term joy of giving a gift may be overcome if you find yourself in need later on. End of life expenses can pile up, so it is important to set out a plan for your own potential expenses before giving away significant sums of money.

Second, people should consider consistency and the appearance of favoritism. The birth of a first grandchild can sometimes inspire lavish attention and gifts, but if that same attention and gift giving isn’t repeated for future grandchildren, then familial resentments may build up. Hurt feelings may arise if the first-born of another of an individual’s children doesn’t receive something similar to what the very first grandchild received. One may never know how many grandchildren they will eventually have, but is important to keep in mind a clear, consistent, and sustainable gift giving plan to avoid potential familial disparities.

That being said, an individual should never feel compelled to give a gift if circumstances change. There is never any real obligation to give a gift.

Once the decision to make a gift has been made, there is then the question of the exact form of the gift. For 2017, the gift tax exemption is $14,000 per recipient per year. Married couples can combine their exemptions to have a limit of $28,000 per recipient per year. Keeping under those limits means that the gift will be tax exempt for both the giver and the recipient.

Giving outright gifts of cash can cause problems. Outright gifts to grandchildren who are old enough to know what money is, but have not yet developed a firm appreciation for the value of an earned dollar, may be spoiled by large gifts. The money might be spent on something disappointingly frivolous. Additionally, even if the money is saved or invested in the grandchild’s name, the grandchild will then be responsible for paying taxes on any capital gains. Also, all assets held in the grandchild’s name can significantly reduce the grandchild’s eligibility for college financial aid.

A common approach for gifts to younger grandchildren is to create, or give money to, a 529 college savings plan. The growth and distributions from a 529 plan are generally tax exempt as long as the withdrawals are used for qualified educational expenses. How a 529 plan is structured can, however, affect a grandchild’s eligibility for financial aid. Plans kept in the grandparent’s name will not affect initial financial aid eligibility, but distributions from a grandparent owned account will reduce financial aid eligibility in subsequent years. Plans kept in a parent’s or dependent student’s name will affect initial eligibility a small amount, but qualified distributions from those accounts will not affect financial aid eligibility in future years.

If an individual wants to take a longer term approach to gift giving, then a trust may be an appropriate vehicle. A trust could be set up and managed to ensure sustained giving over time or availability to make gifts when an individual’s grandchildren reach certain life milestones.

Regardless of what form of gift you wish to make, it is important to meet with an elder law attorney to help you plan for your own potential expenses and to help you develop an appropriate and sustainable gift giving plan for the future.

Please call Martha C. Brown & Associates at (314) 962-0186 to create a plan for your and your family’s future.