Grandparents have choices in financial giving

The Bakersfield Californian
December 10, 2010

Now is the time of year that doting grandparents begin thinking about buying “just right” presents to put under the tree. Often those presents come in the form of cold, hard cash.

MetLife Mature Market Institute recently conducted a nationwide survey of grandparents age 45 and older with grandchildren under age 25. Researchers examined attitudes and behaviors about providing financial assistance to grandchildren.

They found grandparents today take an active and generous role in providing financial assistance to their grandchildren. They often increase their giving in economically strained times, such as the present recession.

“Grandparents appear to prefer to step in earlier with smaller amounts of support, rather than to provide a larger legacy later,” MetLife researchers reported.

They found: Nearly two-thirds (63 percent) of America’s grandparents have provided financial assistance or monetary gifts to their grandchildren in the last five years; 70 percent gave less than $5,000. The median amount provided was $3,000 over that period, and the average amount was $8,661. The total was an estimated $370 billion in financial support.

The reasons most cited for financial assistance/gifts were for general financial support (40 percent), education (26 percent) and major life events (21 percent). One-quarter (26 percent) are now providing more assistance than in the past, due to the current economy.

Many of my boomer-and-beyond-age clients struggle with the questions: How much should they give their grandchildren? How should they give it?

My answer: That depends.

First (and foremost) you must determine how much money you can give away without endangering your own financial security. Evaluate your assets, income and lifestyle. Factor in inflation. Estimate the number of years you will live. (No one really knows, but actuarial charts can provide an educated guess.) That should give you a good idea how much money you will need to slide to the finish line.

The law allows you to give away $13,000 in assets a year per beneficiary tax free. There are many strategies for “gifting” that amount and more. Confer with a financial planner or accountant to fully understand your options and their implications. For example, if your “gift” is intended to help your grandchild pay for a college education, you must determine how your assistance will affect the student’s eligibility for financial aid.

A 529 plan is a newly created state-sponsored college savings plan. California is one of the early states to embrace the program that allows parents or grandparents to set up an account in the name of a child who becomes the beneficiary of the account. The earnings grow federal income tax-deferred until they are withdrawn to pay for college expenses. At that time, they are taxed at the student’s tax rate, which usually is fairly low. Since the money is not in the student’s name, it has less impact on financial aid eligibility.

It is important for a grandparent to define the “gifting” goal. Is the money intended to offset educational costs, help with day-to-day living, finance travel or acquire property? There are many reasons to give money to a grandchild. Each reason is a “special circumstance,” often covered by a special tax rule. How you gift may also affect the taxes you pay.

Do you want your grandchild to have immediate access to the money, or delay payment until he or she reaches a more mature age? Are you worried your grandchild will blow your $5,000 gift on Nintendo games? A custodial account allows money to be given to a minor, while a parent or guardian maintains control over the account.

Perhaps you might wish to make a payment directly to a university for your grandchild’s tuition, or to a dentist or doctor for medical care.

Other options include giving savings bonds. These are popular because they can be given in small amounts — $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. The purchase price for each is half the face value. Interest is paid out when they are cashed. While they are “very reliable investments,” they might not bring a “desirable return” in times of high inflation. The income on Series EE savings bonds purchased after Jan. 31, 1988 is now tax exempt if used to pay for college tuition. Mutual funds, zero coupon bonds, pre-paid tuition and education IRAs also may be considered for gifting.

But with the gift of any money, grandparents should also impart the gift of wisdom.

The MetLife survey revealed that only a minority of grandparents are using their considerable influence to talk to their grandchildren about money. Particularly when giving the gift of money, grandparents have the opportunity to share their financial wisdom.

Whatever form you decide to use and no matter how much you decide to give, talk to your grandchildren about the importance of saving and living within one’s means. Children tend to tune out their parents. But grandparents still seem to have their ear.