Gifts for Your Grandkids
What can I give to my grandchildren? What will make a difference? Grandparents often come to these questions when they realize that the little ones have all the “things” they need and more. New toys, electronics or sports equipment? They will likely be outdated by next year.
Many grandparents are taking another approach. They establish, or contribute to, a grandchild’s college education fund. Section 529 of the IRS code makes it possible for people of modest means, as well as those with greater wealth ,to contribute significant amounts over the years. The funds are known as “529 plans” and are administered by the states.
David Freeman-Woolpert, financial planner and owner of Altus Investments in Concord, says it’s a simple and reliable way to set aside money for college expenses. An account is established in the grandchild’s name, but is controlled by the grandparent (or whomever established the account). Others may contribute as well.
There is no federal tax on the fund if all money is used for higher education at an accredited institution. If the money is used for other purposes, there will be a 10 percent penalty and the growth of the investment will be taxed. The Pension Protection Act of 2006 made this tax exemption permanent.
A 529 plan can begin with as little as $1,000 or a commitment to a monthly contribution of $250 until the base amount is reached. The IRS allows an annual gift of $12,000 to be made and deducted from the giver’s taxable income. Or a one-time gift of $60,000 can be made and, after five years, annual $12,000 gifts. Larger contributions will be subject to gift tax requirements.
An investor can choose an out-of-state plan. States, eager to be competitive, want the best possible returns. Each state chooses an investment firm to manage its plan. Freeman-Woolpert says New Hampshire works with Fidelity while Rhode Island chose Alliance-Bernstein while The Calvert firm serves Washington, D.C. he has worked with all of them.
A 529 plan offers flexibility — it can be changed to accommodate varying circumstances. If it becomes clear, for example, that the beneficiary is going to receive a full scholarship or does not plan to attend college, another beneficiary can be named. You can choose an age-related account, which will shift to more conservative investments as the child moves toward age 18, or you might instruct the plan manager to invest in certain types of mutual funds. The money does not have to be withdrawn at the beneficiary’s 18th birthday. This works well for the many young adults who opt for a period of travel between high school and college.
There are other ways to set aside money for your grandchildren. David Ward, of Ward & Webb in Keene says you can set up an account at a bank or with a financial services firm in the child’s name. The grandparent or a person that the grandparent names is the custodian; the child is the owner. At age 21, he or she has access to the money whatever his or her circumstances.
The advantage of this approach is simplicity. The disadvantage is that the custodian’s control is limited. There is no tax benefit, except to the giver within the limits of the IRS gift tax exclusion. Guidelines for New Hampshire custodial accounts are found in New Hampshire legislation, RSA 463-A.
Some choose to establish an irrevocable trust for the child. This gives a greater degree of control of the asset. Whoever sets up the trust is the grantor. The grantor selects a manager or “trustee.” It can be a family member, though Ward suggests that a neutral third party is preferable. The grantor, as part of the trust agreement, sets guidelines for the distribution of assets. Asset distribution may be made contingent on age, completion of college or other circumstances. It is up to the grantor; the trustee will carry out those instructions.
There are other kinds of trusts that can offer even greater protection, from creditors or divorce settlements, for example. These include the probate court supervised guardianship and the lifetime protective trust. Such arrangements are complex and should be discussed with an attorney experienced in estate planning.
When thinking about a substantial gift to a grandchild, it is always best to seek professional guidance. NH