ISSUE #11
Giving Money to Grandchildren

Like many people, you may be keenly interested in leaving money to your grandchildren to help them get a good start in life. Yet you take a risk that they may squander your gift and not use it as you intended, for such causes as paying for college, buying a home or starting a business. There are many ways to give money to grandchildren, and some of them are briefly described below:

1. Outright Gifts -- You can simply write a check to your grandchild. However, it is best to give only small amounts this way. With an outright gift, you have no way to prevent a spendthrift youth from using the money foolishly. Another problem is that many financial institutions will not open non-custodial accounts for minors.

2. Custodial Accounts -- To prevent your grandchild from misusing the funds before reaching adulthood, you can establish a UTMA (Uniform Transfers to Minors Act) custodial account. A UTMA will prevent the child from withdrawing the money before age 18. UTMA accounts are simple and affordable to set up. Any earnings are taxed at the child’s tax rate, for children age 14 or older. The main disadvantage is the child has full access to the funds at age 18.

3. A Minor’s Trust -- To control the funds past your grandchild’s 18th birthday, you can set up a minor’s trust. This customized trust is drafted by an attorney and allows you to decide when your grandchild will receive the distributions, regardless of age. For example, you might decide to cover college costs and then distribute one-third of the remaining assets at age 25, another third at age 30 and the rest at age 35. These trusts are often funded through your will, although you can fund them with lifetime gifts. Your attorney can advise you on the correct way to do this.

4. Educational Saving Plans -- If your primary aim is to help with your grandchild’s education, you may wish to set up a tax-favored college savings account. There are several options to choose from, including 529 Plans, Educational IRAs, and pre-paid tuition plans. The earnings are generally not taxed as long as the beneficiary uses them for college tuition. Check with your financial planner for assistance in selecting the best plan for your grandchild.

5. Direct Payments -- You can pay college expenses directly for your grandchild. These payments do not count against your annual gift tax exclusion (see below), so you can give each grandchild more each year. This simple strategy also ensures that your grandchild will have no opportunity to divert the funds for other purposes. You must, however, make the checks out to the school, not to the child or the parents.

6. Savings Bonds -- U.S. Savings Bonds are still an excellent way to give money to grandchildren. They are purchased at one-half the face value and accumulate interest, so no tax is due until the bond is cashed in. In some circumstances, the interest can be exempt from income tax when the bonds are used for qualified educational expenses.

7. Annual Gift Tax Exclusion -- Gifts to grandchildren may be subject to federal gift tax. You may give up to $11,000 to each grandchild each year without reporting a gift. A married couple may give $22,000 per grandchild. If you exceed that, you will have to file a federal gift tax return and report the gift. If you have questions about gift taxes, please consult a tax accountant or a financial planner.

8. Philanthropic Training -- You can also create a philanthropic fund, called a donor advised fund, at your local community foundation. When you name your grandchild as the fund’s advisor, he or she will have the wonderful opportunity of directing gifts from the fund to local charities each year. This is an exceptional experience to pass along to your grandchildren. Ask about these funds at your local community foundation.

This publication has been prepared as an educational resource to help the reader identify areas of potential concern. The publisher is not engaged in rendering legal, accounting or other professional services. The information contained in this publication should not be acted upon without first obtaining the advice of a professional adviser. 2004 © Florida Philanthropic Advisors, LLC. Material may not be used without permission.

Our planned giving director, Paul Ditlevson, can be of tremendous service in helping you integrate your giving goals with your overall estate plan. He can also help you prepare to visit your attorney. You can reach Mr. Ditlevson by calling 419-289-5090 or by email to pditlevs@ashland.edu or regular mail at 401 College Avenue, Ashland, OH 44805.