A financial guide to grandkids

How to translate your love for newest family members into tangible support for their financial future

Resident financial services writer Chris Bouley offers strategies on how to help support your grandchild’s financial future.

From the moment your grandchildren are born through the thrill of watching them grow up, while your first instinct is to hug and kiss, a close second may be to do whatever you can to give them a financial head start in life.

“That’s what comes up right away when we do financial planning with a newly minted grandparent,” says William Shad, a UBS Wealth Management Consultant based in Wellesley, Massachusetts.

One of the simplest and most effective ways to build substantial funds for a grandchild’s long-term needs is to use the annual gift tax exclusion. For 2017, you can give up to $14,000 to as many people as you like without paying tax. Have your spouse make a gift too, and that’s $28,000 a year for each grandchild.

Grandparents might put those gifts into a custodial investment account, established under the Uniform Gifts (or Transfers) to Minors Act – usually known as UGMAs or UTMAs. Yet this approach has a serious drawback: When your grandchild reaches age 18, the age of majority in most states, he or she gets immediate access to those assets – whether they’re prepared to make good financial decisions or not. “You may want to put a little money into custodial accounts, so they’ll have a small nest egg when they go off to college, but don’t overdo it,” Shad suggests. If you want to exercise a bit more control over how the money is used, there are other options to consider, Shad says.

Create a 529 college savings plan

State-sponsored 529 plans are popular for good reason. You could create one for each grandchild, using your own and your spouse’s annual exclusion to fund it each year. Investment earnings in the account aren’t taxed, and distributions to pay the beneficiary’s college expenses are also tax free. And, unlike with UGMAs and UTMAs, you control the account and funds can only be used for higher education.

To get a head start on college savings, 529s allow you to contribute the first five years of savings up front – so, $70,000, or $140,000 with your spouse. Then, five years later, you can make another accelerated payment. “This is one of the easiest ways to get ‘chunks’ of tax-free gifts out of your estate,” Shad says.

Pay college costs directly

But a 529 plan works best if established when your grandchild is young, so the assets have time to grow. For teenagers soon to start college, you might consider writing a check for the student’s tuition directly to the university – the tuition won’t count toward your annual gift exclusion, so it offers a great way to move money from your estate without incurring taxes.

Certain room and board costs (above the school’s “cost of attendance”) don’t have the same exclusion, so you might instead use gift money to cover these additional expenses.

Start a Roth IRA

Your teenage grandkids almost certainly aren’t thinking about retirement. Still, if they earn money at a summer job, for example, they’re eligible to contribute their earnings to a Roth IRA. Investment earnings in the account can compound tax-free for many decades until withdrawn – also untaxed – during retirement.

You can give minor grandkids a jump on saving by establishing and using some of the annual exclusion gift to fund it for them. The annual contribution can’t exceed the amount that they earned and is capped at $5,500 for 2017.

Put your gifts in trust

A way to avoid tempting grandchildren with too much cash too early is to establish one or more trusts naming them as beneficiaries. “This is a great way to keep assets protected,” says Shad, not only from the kids’ spending the money but also from others, for instance, a divorcing spouse or a judgment in a lawsuit.

Or you could use what is sometimes called a “family bank model” – a trust created to benefit several members of the younger generations. Access to assets, controlled by an independent institutional trustee or an individual you’ve appointed, could be based on certain life events, such as having a baby. Someone who wants to start a business could ask the trustee for a loan, says Shad. A benefit to this structure, he notes, is that it could continue to help those in future generations – helping a great-grandchild, for example.

Your financial adviser can help put together a family forum – so that you, your children, and even your grandchildren are all on the same page when planning for college.

Share your wealth — and your information

Your financial adviser can help you decide how you want to support your grandchildren, using these or other approaches to provide maximum benefits for the grandkids while also reducing the size of your taxable estate.

Whatever strategy you choose, be sure that you have enough funds to cover your own needs for a long retirement, Shad advises. Then, as a final step in this planning process, your financial adviser can help organize a family forum, with your children, perhaps the grandchildren themselves and any other family advisers you want to include. “We present the findings of our analysis to the whole family,” Shad says.

This helps put everyone on the same page, and reaches across the generations with information as well as money.

Says Shad, “For many families, that’s an irresistible combination.”

Chris Bouley is Vice President of Wealth Management at UBS Financial Services, 500 Exchange St., Suite 1210, Providence, RI 02903. He can be reached at 401-455-6716 or via email at christopher.bouley@ubs.com.