Considerations when Gifting to Grandchildren
They say something magical happens when a parent turns into a grandparent. Of course there’s the unconditional love and admiration for this child of your child; and there’s also the urge to shower them with toys, clothes, presents, money and other gifts!
Many people don’t want to wait until they are gone to give gifts to their grandchildren, and they think, ‘I want to spoil them while I’m still here!’ But that’s not always a good plan for the grandparent. Many state and federal programs – including Medicaid and Veteran’s Administration benefits – are needs-based programs, wherein making gifts could disqualify you from those programs. So what are some options to consider when giving money to grandchildren, nieces and nephews, or other intended beneficiaries?
College Savings Programs. These programs, more commonly known as “529 plans”, are state-sponsored programs, authorized by the U.S. tax code. These allow grandparents (or parents, or anyone who wants to create one) to set aside money for their grandchild, specifically for higher education expenses later. These are great for a few reasons: they allow control over what the money is spent on, rather than writing the grandchild a blank check to spend on whatever they want; there are tax advantages for the account creators (grandparents); and some plans allow you to pay for tuition credits now, while tuition is presumably lower than what it may be in the future! There are a few downsides, however: limited ability to withdraw money from these accounts without penalty; not all states and not all schools participate; and these are still considered assets in the grandparents’ names if they later try to apply for Medicaid or other needs-based programs.
Smaller Gifts. Grandparents can still make typical gifts to their grandchildren, especially at gift-giving holidays and birthdays. However, this is not the time for a large gift. Depending on the state’s rules and how they apply them, gifts can be counted against you for Medicaid and VA purposes. As long as you stick to smaller amounts, you are less likely to be penalized for those gifts. And don’t make them a routine, either! Medicaid can total those gifts and penalize you for them.
Trusts. Utilizing trust planning for gifts to grandchildren is often the best route, unless delaying the gift until the grandparent’s death is not desirable. By setting up a trust during life, the grandparent can retain control over the assets, and, depending on the type of Trust, it may not count against them for Medicaid or other needs-based programs. When the grandparent passes away, the money can be left to grandchildren in trusts, where it is protected and managed for them, by someone the grandparent appointed during their lifetime. This allows for flexibility for the grandchild, while receiving the benefit of asset protection.
These are not all your gifting options, but just some things to consider the next time you want to spoil your beloved grandchildren.