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Gifting To Grandchildren

Posted by maureen

March 1, 2007 |

Many grandparents find themselves in the unique position of being financial willing and able to make gifts to their grandchildren. There are a large number of choices available and they should all be considered carefully and discussed with your children before any action is taken. You need to understand all the ramifications before making any decisions. Let’s look at a few popular choices for making financial gifts to your grandchildren:
Cash Gifts.
If you decide to give your grandchild an outright gift than you need to know a couple of things you can give each grandchild up to $12,000 (in 2007) without having to report the gift. If you are married, both you and your spouse can make such gifts. For example, a married couple with four grandchildren may give away up to $96,000 a year with no gift tax implications. In addition, the gifts will not count as taxable income to your grandchildren (although the earnings on the gifts if they are invested will be taxed).This is a “no -strings attached” gift and once you make the gift you give up all control of it. Grandparents can also pay a grandchild’s tuition (not room, board, or books) directly to the school he or she is attending and incur no taxes. Neither the tuition gift nor the $11,000 annual gifts are included in the lifetime gift tax exemption of $1 million.

Section 529 Plans. Many financial experts agree that state-sponsored 529 plans are the best way to save for a college education. Authorized by Congress in 1996, funds in these accounts are fully tax free through 2010, when used for college expenses. Some states also give their own tax deductions. The owner of the account has complete control over the money and can change the beneficiary if he or she wishes.529 accounts can also fund your own continuing education.

Section 529 accounts fall into two categories:

  • Prepaid tuition savings. Funds are used to lock in tuition rates at state colleges and universities. These funds can also be used for private or out-of-state-institutions, although the full amount may not be available.
  • College savings plans. Funds can be used at any college or university, public or private, and some foreign institutions.

All 50 states offer Section 529 accounts and you don’t need to live in that state to participate. They vary so do your research to get the best ones.

Coverdell Savings Accounts.
The Coverdell accounts allow an annual contribution of $2,000 towards elementary, secondary or college education costs. .Owners of the accounts must have incomes below $110,000 if single and $220,000 if married . While adults contribute to the savings plan, a child age 17 or younger is named as the account’s beneficiary. The contributions are not tax deductible, but they and their earnings can be withdrawn tax-free as long as they are used to pay eligible schooling costs. It should be noted that a Coverdell account is considered an asset of the student and can substantially reduce the student’s eligibility for financial aid.

Savings Bonds.
Savings Bonds are the most popular type of security in the world for a reason. Bonds are free from most taxes and increase in value monthly. Plus, you can receive extra benefits if the bond is redeemed to pay for college expenses


Comments

2 Comments so far

  1. Jessie on March 1, 2007 11:44 am

    Great ideas. As a mom of young kids we are already “maxed-out” on toys. Cash gifts, stocks, money towards college, etc. are so appreciated as a parent.

  2. Garry on March 1, 2007 2:35 pm

    I agree with Jessie

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