How Should Grandparents Give Money to Grandkids?
How can grandparents give money to their grandkids? How nice of you to ask!
Let’s start with tax-free giving and go from there!
How Much Money Can a Grandparent Give a Grandchild Tax-Free?
Can Grandparents give money to Grandchildren tax-free? Yes, but it takes some planning and understanding of the tax code.
As to how much money a grandparent can give to a grandchild tax-free, the number depends on what kind of tax you are talking about. Let’s dive in!
Can Grandparents Give Money to Grandchildren Estate Tax-Free?
If we are talking about estate taxes, the answer is almost certainly yes! For example, you could give a child nearly $13.61M in 2024, and that would be estate tax-free. The estate tax exemption is huge right now, so you could use up your entire unified estate and gift tax amount in a single year in a gift to a grandchild.
The yearly gift limit is $18k per person. So, if you and your spouse want to split a gift, you could give any grandchild $36k a year. Though you would have to report it as a gift split on your taxes, this would be a tax-free gift to a grandchild.
Let’s look at some other taxes.
Can Grandparents Give Money to Grandchildren Capital Gains Tax-Free?
The basis on capital gains carries over with the gift. Therefore, you cannot transfer a gift and expect to escape capital gains.
Never gift losses, as losses don’t transfer. If you have a loss asset, sell it, take the loss for tax purposes, and transfer cash. If you have a highly appreciated asset, you can transfer it, but the basis transfers with it.
For example, if you give them $15k of ABC stock with a basis of $5k, you have transferred the basis over with the gift. So, if they file their own taxes, they may very well be in the zero percent long-term capital gains tax bracket, and they could sell the stock capital gains tax-free.
This is called downstream gifting and is very effective when grandchildren are initially filing their taxes but not yet making a lot of money. However, watch out for the kiddie tax if they are still on their parent’s tax return!
Let’s look at some other ideas regarding tax fee gifts to grandchildren.
What are the Best Gifts to Give Tax-Free to Grandchildren?
Direct Payments
This is important! A Grandparent can Pay a Grandchild’s college or medical bills without any tax implications. You can pay unlimited college or medical costs if you directly pay the college or hospital (don’t give it to the child to pay the bills).
Cash
Cash is the most common gift, but they will pay ordinary interest on any gains in a savings account (etc.).
529 College Savings Plans
College savings is an excellent idea for most grandparents. There is a $18k limit yearly, but you can superfund five years’ worth ($90k) in any year. So, two grandparents could fund $180k at once (for five years) into a 529 for a child. This can be used to pay many college expenses, but also some expenses before college as long as they qualify.
And don’t forget that a 529 plan can be used as a bonus savings account!
Finally, remember that some states have a yearly state income tax benefit for funding 529 plans for grandchildren. So you can get a state income tax write-off and yet have the tax-deferred goodness of a 529 plan.
Can Grandparents give money to Grandchildren tax-free? YES, Use a Roth IRA
Perhaps the best way grandparents can give money to grandchildren tax-free is to help them fund a Roth IRA if the grandchild has income reported to the IRS. Even if they spend their money, if they report qualified income to the IRS, you can set up a Roth IRA for them in the amount of the income up to the $6K Roth IRA limit. This is the best way you can give them tax-free money!
Fund an Employer Retirement Plan
If grandchildren are working but cannot afford to put money in their 401k, a grandparent could give them the money to spend and have them increase their deduction into the 401k. After all, money is fungible, and it doesn’t care where it comes from.
Better yet, if they have a Roth 401k option, fully funding that with $20k a year is a tremendous tax-free gift to your grandchildren!
Be the Bank; Give Grandchildren a Loan for Home Purchase
When grandchildren are ready to buy a home, you could offer to be the bank. Though you need to draw up formal loan documents and charge at least minimal interest amounts (as determined by the IRS), this is a great way to save them some interest and yet have a bond alternative for grandparents.
Education
Education is the best tax-free gift grandparents can give grandchildren. Consider A Simple Path to Wealth as a starting point.
Other Ideas
Custodial accounts (UTMAs and UGMAs) can be opened by most custodians. You can manage them until the grandchild turns the age of majority (18, 21, or 26 – it is state-dependent), but it does become their asset when they reach the magic age. Before that, while they are still on their parent’s tax returns, custodial accounts can be very tax efficient. If the growth is less than ~2k a year, there is minimal taxation, and the income does not stack on top of the parent’s income.
Ensure you use low-cost, broadly diversified index ETFs to demonstrate good behavior to them. No individual stocks!
Cryptocurrencies. Just staying; they are going to do it anyway. So why not start young and give them some crypto?
Experiences With You! Perhaps the best gift to give is time with you! Grandparents can take grandchildren on yearly trips or save up for something unique. This is the best tax-free gift that grandparents can give to grandchildren!
Inappropriate Gifts for Grandparents to Leave Grandchildren
I would suggest you don’t give cash to them to leave in a savings account unless they have goals in the immediate future. Meanwhile, a grandchild must earn, save, and invest. Unless you teach them how to invest, who will? Investing in something more than a savings account is the true blessing you can leave a child.
And we all know that children will make mistakes with their money. We all did. They hope to make the mistakes early in life rather than with extra zeros at the end later in life.
Similarly, I don’t suggest series EE- or I-Bonds as gifts to grandchildren. Hopefully, these will keep pace with inflation, will not grow over time, and bless grandchildren like equities. Instead, I suggest a savings bond gift alternative such as stocks or, even better, low-cost, broadly diversified ETFs.
Also, do not give gold or other precious metals. While coins can be a fun gift, there is no learning you are giving them, aside from how to get a haircut when you lose it or turn it into cash.
Finally, life insurance for grandchildren is plum a bad deal. There are indications for permanent life insurance, but a child has no indication.
Conclusion—Grandparents Giving to Grandkids
So, the best tax-free gifts you can give your grandchildren are education and experiences!
If you want to focus on monetary gifts, Roth IRAs, 529s, and contributions to employer retirement plans can all be lovely tax-free gifts.
If the concern is the estate tax, keep under the $18k yearly exclusion amount, or go ahead and use up some of your lifetime exclusion if you don’t have a massive estate.
Meanwhile, you can’t help them escape ordinary taxes unless you give them cash to help pay the taxes if they fund a Roth IRA or Roth 401k. Capital gains transfer with the gift, so there is a creative way to pay less taxes if you gift assets between the generations.