Hamilton Herald Masthead


Front Page - Friday, September 11, 2015

Consider long-lasting financial gifts to grandchildren

Financial Focus

Stan Russell

On Sept. 13, we observe National Grandparents Day. If you’re a grandparent, you might get a card or a little present from the grandkids. However, you will probably get greater pleasure from the gifts you give them. And if you’d like to make a financial gift, you’ve got some attractive options.

How you choose to make your gift depends somewhat on how you’d like the money to be used. Do you want to provide an intermittent source of income that your grandchildren can use at various points in their lives? Or would you rather designate your gift to be used exclusively for college?

If you’re interested in the “intermittent income” type of gift, you might want to work with a legal professional to establish a trust, which offers several key benefits, including the following:

Wide choice of investment options – A trust can be funded with virtually any financial instrument – stocks, bonds, cash, and so on. Although the trust owns the assets, you, as trustee, control them and can decide what type of investments to make.

Flexibility in distribution of assets – You can direct the trust to distribute assets to your grandchildren at various ages. Many trusts make payouts at 25, 30 and 35 years of age, but it’s your choice. And you can determine when the trust will terminate.

Reduction in estate size – Currently, only a small percentage of Americans pay estate taxes, but these laws are frequently in flux. So someday it may be to your advantage to have reduced the size of your estate through gifts to an irrevocable trust. As of 2015, you can give up to $14,000 per year ($28,000 for a married couple filing jointly) into each irrevocable trust you create for each grandchild without incurring gift taxes.

Your grandchildren can obviously enjoy the financial benefits of being beneficiaries of a trust. But if you want to specifically earmark some funds for your grandchildren’s college educations, you can find other vehicles that may be more appropriate.

One such possibility is a 529 plan. Contribution limits are quite high, and your earnings can accumulate tax free, provided they are used for qualified higher education expenses. (529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty on the earnings.) Furthermore, your 529 plan contributions may be eligible for state income tax incentives. But 529 plans vary, so check with your tax advisor regarding these incentives. 

If you, as a grandparent, own a 529 plan, it is not reported on the Free Application for Federal Student Aid (FAFSA), the document commonly used to determine a student’s financial aid eligibility. However, withdrawals from your 529 plan will be treated as untaxed income to your grandchild and could significantly affect your grandchild’s financial aid eligibility for the following school year. Consequently, you may want to save your 529 plan assets for your grandchild’s final year of college. 

By establishing a trust or investing in a 529 plan, you can help improve the quality of life for your beloved grandchildren. Consider taking action soon. 

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor (member SIPC). Contact Stan at Stan.Russell@edwardjones.com.