Grandparenting: Counting the Cost

Whether it’s unlimited trips to the ice cream shop or no-budget toy shopping, Grandma and Grandpa love saying “yes” to just about every request that comes from their grandbabies’ mouths.

But it’s also a reality that grandparenting can come with a hefty price tag. Research conducted by AARP in 2019 determined that 94% of all grandparents provide some kind of financial support to their grandchildren at an average of $2,562 annually. At the time of the survey, it was reported that of the grandparents surveyed:

• 86% contribute to gifts
• 26% contribute to vacations
• 21% contribute to school/college tuition
• 14% contribute to day-to-day expenses (food, clothing)
• 8% contribute to allowance/payment for chores
• 5% contribute to major expenses (medical, mortgage)

For grandparents looking to support their grandchildren financially, several strategies can help maximize the impact of their contributions.

Set up or contribute to a 529 Plan

Education costs, as noted on the list above, is an area where grandparents often get directly involved. Especially with the ballooning amount of student loan debt carried by millennial parents themselves, saving for their kids’ college becomes a bigger challenge every year, and many parents indicate that the help of grandparents is essential. Many grandparents utilize their state’s 529 plan, making gifts into a qualified account that grows tax-free until the child is ready for college. Funds from the plan can then be withdrawn tax-free to cover qualified expenses such as tuition, books, lodging, and other necessary outlays for higher education.

Set up or contribute to a custodial account (UGMA/UTMA)

Grandparents can also contribute to a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, which is managed by a custodian (often the grandparent or parent) until the grandchild reaches the age of majority, specified by state law. While these accounts don’t grow tax-free like 529 plans do, UGMA/UTMA accounts can be used for a wider variety of child-related expenses, which includes education. It’s important to note that once the child reaches the age of majority, the UGMA/UTMA assets legally become their property.

Contribute to a grandchild’s Roth IRA

For older grandchildren who have earned income (subject to income limits), grandparents can make cash gifts into the grandchild’s Roth IRA account. These funds will grow tax-free for the rest of the grandchild’s life. The maximum contribution to a Roth IRA in 2024 is $7,000, or $8,000 if you’re 50 or older.

Make annual exclusion gifts

The IRS will let you give a certain amount of assets per year to any number of people without lifetime gift tax implications. This is known as the annual exclusion. For 2024, the annual limit per recipient (made by each gift giver) is $18,000.[1] In other words, Grandma and Grandpa can gift each grandchild a combined $36,000 (in 2024) while staying under the annual exclusion limits. Please note that gifts made to minors need to be directed toward an account made for their benefit (529 Plan, UGMA/UTMA, Trust account). All of the strategies outlined above (529 Plan, UGMA/UTMA, Roth IRA) count toward the annual exclusion gift limit for that grandchild.

Establish and fund a trust

Consider setting up a trust account with your grandchild as the beneficiary. You can determine the age(s) at which the grandchild can receive distributions and even stipulate what the funds can be used for.

Add them to your will

Adding a grandchild to your will ensures your good financial gifting intentions are realized after you are gone while keeping your funds available to you while you are still living, in the event you find yourself in need of them. By naming them in your will, you can make cash bequests or gift them specific personal property (jewelry, car, etc.)

If providing financial help is a central priority for a grandparent, however they decide to do it, it’s important to incorporate the gifting in their overall financial plan. At Modera Wealth Management, we help grandparents and parents make sound plans that incorporate these priorities, charting a path for their own long-term financial security as well as helping them enjoy the satisfaction that comes from contributing to the success of future generations.

To learn more about gifting strategies for family members, please reach out to your Modera advisor.