Many grandparents want to leave a legacy behind to help their grandchildren
By Deborah Jeanne Sergeant
An inheritance gift of money may not be the best thing to assist your grandchildren long-term. Fortunately, other financial strategies can help your gift provide a lasting legacy that will benefit your grandchildren for many years to come.
“It always comes down to the goal: what are we trying to accomplish with a financial gift?” said Stephen Wisniewski, chartered retirement plans specialist and financial adviser with Equitable Advisors in Syracuse. “If we really want to encourage higher education, then a 529 qualified — or tax-advantaged —tuition plan may accomplish that and provide some tax benefits as well.”
He also said that discussing gifts with a trusted financial adviser can better ensure that the decision best fits your financial situation.
“Of course, a grandparent could also incentivize other types of savings, like encouraging funding a Roth Individual Retirement Account once their grandchildren earn income, or even simply helping fund a Uniform Transfer to Minor Account (UTMA)/Uniform Gift to Minor Account (UGMA) while their grandchildren are minors,” he said.
He views these as an option to help grandchildren advance both financially and in the knowledge of finances regarding matters such as compound interest, the stock market, mutual funds and even mistakes you have made. You could also offer to match some of the grandchildren’s saving efforts.
“I think grandparents who are interested in supporting their grandchildren need to determine what is the best method of helping them,” said Randy L. Zeigler, certified financial planner and private wealth adviser with Ameriprise Financial Services, LLC in Oswego. “By that I mean what is in the best interest of that child?”
He added that paying for schooling each semester may demotivate some students. Working for scholarships, earning tuition money and borrowing some money may underscore the importance of studying.
“After successfully completing college, grandparents could always assist the student in paying down or paying off their loan balances,” Zeigler said. “By contributing in advance, the student may be de-centivized from applying themselves and just waste the scholarship support and drop out of school when it gets difficult. By waiting to help this child, grandparents will not have thrown their hard-earned money away on an unmotivated child.”
He also suggested other contributions such as gifts to start a business, attend trade school or pay for big-ticket items like wedding expenses or a first home downpayment may help, but “applying personal wisdom regarding each child’s needs, interests and motivations is the task of a thoughtful and loving grandparent.”
“Giving younger people too much money early in their lives can certainly be a demotivating decision or even worse, support their bad habits like chronic unemployment, gambling or drug or alcohol addictions,” Zeigler said.
Your adult children may have a better understanding of your grandchildren’s needs and how they may need help. It may seem fair to give the same amount to each child or grandchild. However, some may not need financial help. Talking frankly about your intentions can help your adult children understand your motivations.
Rob Rolfe, financial adviser at Harmony Financial Services in Oswego, advises giving without strings attached, such as if a grandchild wants money to start a business and the business fails. It’s vital to only give what you really can afford to lose and realize that the lessons learned in the business attempt may be the real gift.
“If you give someone $10,000 you can’t get it back because you don’t like what they’re doing,” Rolfe said. “The statistics of businesses starting and succeeding are far outpaced by those not succeeding.”
Grandparents can open a custodial account for grandchildren so that when the child turns 18 or 21, the money becomes theirs.
Paying for part of the tuition directly to the school rather than giving the grandchild a gift may be better for students who receive financial aid. Rolfe said that gift doesn’t count as income and “it’s less money the kid has to borrow.”
Vicki Brackens, chartered financial consultant, financial planner and president at Brackens Financial Solutions Network in Syracuse, recommends looking into New York’s 529 college savings plans.”
“You’d help your grandkids and yourself because of the tax deduction,” she said.
New York’s 529 plan offers a means of saving, growing and giving money tax-free. The fund is earmarked for college, but the grandchildren can reside and attend any accredited college or trade school in the US. Grandparents control the fund until the gift is complete when the grandchildren go to college. Unused funds may be rolled into a Roth IRA if the 529 has been open for 15 years. The funds grow tax-free as well.
Contributors to a 529 plan can receive up to a $5,000 tax credit for singles and $10,000 for a couple, regardless of the number of recipients.
“It also provides funding for the child for potentially qualified expenses for tuition and supplies and room and board,” Brackens added. “It can be in the account for only one day for the tax credits.”
The funds must be paid directly to the school or paid directly to a lender for student loan debt.
Brackens also said that if for some reason the grandchild doesn’t need the money, it can be transferred to any blood relative like a sibling or cousin with no tax implications. Even the child’s parents or grandparents can use it to go back to school.