Best vehicle for grandparents to give $$ to their grandchild?

[mtn]

Looking for thoughts on the best way for grandparents to give money to their grandkid. Looking to avoid any potential taxes for any party (including the parents). Doesn’t matter if it goes into the grandkids 529* or into the parents’ IRA or brokerage accounts, straight cash in an envelope… we really are open to anything. Kiddo does not have an IRA and no real legitimate way to show income.

Any thoughts?

*I dislike the 529. I would prefer to avoid it.

[reeshau]

For what purpose are you looking to give the money?  And how much?

It sounds like this isn't really an inheritance.  You mention a 529, but then say you don't like it.  Is it for education?  Is it money the kid can blow?  Are you specifically looking for money the kid *can't* blow?

FWIW, DS is the only grandchild on DW's side.  We set up a 529 for him, and talked to the grandparents about it as they were visiting / gathering before he was born.  Grandpa was concerned, because if DS did not use the 529, our plans were to look at his cousins, all on my side.  This was a blind spot for us.  Everyone in the family is very supportive of education.  Eventually, Grandpa came back with this solution:  they named DS in their will, directly, with an amount to be distributed when he is 25.  He is 7 right now, and grandpa is 80, so that distribution is likely to be given on time.

Chances are, his 529 will actually fully pay for undergrad.  If DS goes for a graduate degree, then this gift would easily cover that.  If not, then as he is settling down and beginning his career, he will have a full down payment on a house.

[mtn]

Purposes are to gift money to their grandkid for, in an ideal world, either college, or a downpayment, or to start a business. Secondary purpose would be to reduce their estate to reduce the chances it may get hit with any estate taxes. Anything kiddo gets would be duplicated for her cousins on that side as well.

I dislike the 529 because of how restrictive it is. I have $20k left in mine that I cannot touch unless I get an MBA. Yeah, I know it’ll go to my kids college, but what if she doesn’t go? She’s only 2!

[nereo]

I dislike the 529 because of how restrictive it is. I have $20k left in mine that I cannot touch unless I get an MBA. Yeah, I know it’ll go to my kids college, but what if she doesn’t go? She’s only 2!

You may want to take a closer look at the “restrictions” here. The 529 was opened up with the 2017 tax act and there is a wide variety of things it can be used for, including vocational, high school and even elementary school expenses. You can also convert your remaining balance to your child.

Even if none of those apply the penalty for distributions is not terribly steep - you pay income tax plus 10% on earning (and only on the earnings). 

[Fishindude]

I set up each of my grandkids a good mutual fund with $10k / each when they were 4 & 2.
Been adding a little to those accounts occasionally since.  Our Covid stimulus checks when to those accounts.

They can do what they want with it, but I encouraged the parents to just leave the money in the for the kids retirement and figure other ways to pay for higher education.

[sisto]

We setup brokerage accounts and made each of us primary beneficiary and the kids we wanted to give the money to were put on as secondary. That way the intended kids get the money and it would be at the step up cost basis.

[Paper Chaser]

Yall are slipping. This one's easy!

[seattlecyclone]

I dislike the 529 because of how restrictive it is. I have $20k left in mine that I cannot touch unless I get an MBA. Yeah, I know it’ll go to my kids college, but what if she doesn’t go? She’s only 2!

You may want to take a closer look at the “restrictions” here. The 529 was opened up with the 2017 tax act and there is a wide variety of things it can be used for, including vocational, high school and even elementary school expenses. You can also convert your remaining balance to your child.

Even if none of those apply the penalty for distributions is not terribly steep - you pay income tax plus 10% on earning (and only on the earnings). 

Really it's a question of what you think the kid is more likely to do with the money. You can invest in an UTMA account in their name and they'll pay capital gains tax regardless of what they do with it. You can invest in a 529 and they'll pay no tax if they use it for school and (income tax + 10%) if they use it for something else. (no tax) < (capital gains tax) < (income tax + 10%). If they use it for school the 529 will be a better choice in hindsight, if they use it for something else the UTMA will be a better choice in hindsight. Which is more likely? You surely have a better idea about that than I.

[Car Jack]

Anyone can pay medical expenses and college tuition for anyone.

So if a kid is in college and tuition is $50k a year, you can pay THE COLLEGE $50k and there is no requirement to report this as a gift whatsoever.  Technically, you can't pay the fees, room, board.  I say Technically because as far as the college is concerned, there's a dollar amount bill due for the semester.  Say it's $25k of tuition and $25k for room, board, fees and such.  You can go to the college with a check and pay "tuition".  The kid's grandparent on the other side can walk in and also hand the college a check for $25k.  You both can consider this is payment for tuition and not for room, board, fees.  The college does not break it up and you both can put in a memo "tuition for first semester".

Why do I talk about this?  When my son was in college, my mom and father in law did exactly this one semester.  They both are the type who will shake their fist at clouds shouting "it's none of the government's business!".  My explanation of the legit avoidance of gift reporting made both of them very happy and eliminated their hesitation, thinking they'd have to report the gift.

[nereo]

Anyone can pay medical expenses and college tuition for anyone.

So if a kid is in college and tuition is $50k a year, you can pay THE COLLEGE $50k and there is no requirement to report this as a gift whatsoever.  Technically, you can't pay the fees, room, board.  I say Technically because as far as the college is concerned, there's a dollar amount bill due for the semester.  Say it's $25k of tuition and $25k for room, board, fees and such.  You can go to the college with a check and pay "tuition".  The kid's grandparent on the other side can walk in and also hand the college a check for $25k.  You both can consider this is payment for tuition and not for room, board, fees.  The college does not break it up and you both can put in a memo "tuition for first semester".

Why do I talk about this?  When my son was in college, my mom and father in law did exactly this one semester.  They both are the type who will shake their fist at clouds shouting "it's none of the government's business!".  My explanation of the legit avoidance of gift reporting made both of them very happy and eliminated their hesitation, thinking they'd have to report the gift.

Indeed - payment of someone’s tuition falls under the IRS’s exclusion to the ‘gift tax.’  However double payment of tuition might raise some questions should one or both donors get audited.

[maizefolk]

Yall are slipping. This one's easy!

A reasonable option. But for grandparents who really love their grandchildren you cannot go wrong with the Conquest Knight XV. The pinnacle of Canadian armored car engineering.

[getsorted]

It sounds like an UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account might work for you. I could spell out the exact nature of this but Investopedia does it better.
If you are wanting to give a large sum, you can also just break it up over many years, keeping under the gift tax exclusion ($15,000 currently).

Sometimes our clients prefer to retain ownership until a child is older - in that case, we usually recommend opening a separate account in your name and designating a child or grandchild as the primary beneficiary of that account. Others prefer an "earmark" approach and keep one account with multiple holdings, designating each holding as being for the benefit of a particular child.

Personally, for me, based on what I've seen in this industry? if I were a wealthy grandparent, I would keep everything I intended for my heirs to have in my name until I died, even if I bought someone a house or car, and never give over the gift tax exclusion amount annually. All it does is wreck peoples' lives. Young people need to earn their way and understand what money is before it starts falling into their laps. Paying tuition directly, etc. is the way to go. You have no idea how often we see the same pattern: hard-working, business-building grandparents, followed by a middle-class second generation who grew up working in the family business, followed by a third generation who were born owning valuable family company stock and are absolutely financially cluleless, have no idea what they are doing with their lives, and are financially dependent their entire lives. Just my two cents.