Saving Plans for grandkids

We are looking to set up a saving account for our granddaughter that is outside of her parent’ control. US Saving Bonds are almost out because with the new electronic system, she would have to have a TreasuryDirect account under her parent’s account. I say almost out because you can get I-Bonds as a present for another person with your IRS refund but then that can be an issue as well.

Bank accounts may be an option but we want a better return than pennies on thousands. Can we open up a brokerage account for her that her parents can get at while she’s in her minority? How would we handle any tax liability (if any) for her from dividends, etc. If your solution is a 529, yeah but that is for education so that will be one savings plan we set up. We were thinking we also want a, “Happy 18th birthday! Here’s an assload of money for your disposal. Buy a car, put it into a retirement account. Travel to Europe. Whatever you want.” fund.

You can make a Custodial Investment Account for a minor where you and your spouse are the Custodians and that it should then go to the minor when they’re an adult. If you want to keep it simple, just go with a mix of an S&P 500 Trust and NASDAQ 100 Fund or the like.

Obviously work with a trusted representative of an Investment company like Merrill to set it all up correctly. I’m assuming you probably already have a relation with such a company you trust. So this should be no problem.

BTW: The max annual exclusion is actually up to $16000 now per Parent or in this Grandparent.

As the money is actually hers, there should be no tax hit to you. The dividends shouldn’t cause issues for a minor, except that she’ll need to report it and do a fairly simple tax prep. The free Federal online one should be easy enough.

I’m no expert, but I looked into this somewhat recently and it seems to be the way to go.

ETA: Sorry, one more thing. This kind of account is generally used for amounts up to the annual exclusion. For large amounts, people generally set up trusts and that is way beyond me.

Not currently but I have worked with ING in the (distant) past. If we do stocks I have a few index EFT I’d put it in like SCHG, VONV, maybe SCHF for international diversity, etc.

Two issues to keep in mind when setting up custodial accounts:

  • You want to check to see how the existence of the account will impact the child’s ability to obtain financial aid for college

  • These types of accounts usually transfer to the child automatically on their 18th birthday - depending on the child, that may not be the best thing in all cases

Another option is to just set up an account in your name that you have privately designated as being for the grandchild. You will have to pay any taxes required, but the money won’t count toward financial aid calculations, and you will have the option to give as much as you like at any time.

I wish I made enough to worry about setting up a trust. We’re looking at a total of $1000 per year per (currently 1) grandchild.

Absolutely, I get that. I’m well out of the league for worrying about Trusts also. The investment account I’m roughly describing should be good with the additional caveats from SpoilerVirgin.

There are some issues with the designate accounts SpoilerVirgin mentioned though if you have any worries about passing before you would want to transfer the money and if you have worries about falling into the Medicare system where basically all your assets have to reduce to near zero and they can claw back gifted money going back something like 7 years.

It wasn’t a problem, but my mother went through this. Or I should say my sisters with a little help from me went through this for my mother. Her assets were pretty low and no gifting.

I like the Custodial Gift Accounts as the tax hit is the lowest.

I don’t recall the details, my nephew was the go-to guy since he lived near my dad than me or my brother… but yes - dad gave a bunch of nieces a large amount (IIRC about $30,000) not long before he suddenly had to go into assisted living, and so there was the issue that Medicare would not (I think) help pay for his stay in assisted living for 3 years (or was it 2? I’m pretty sure it was not 7). This is to avoid the obvious ploy of someone giving the rest of the family all their money and then expecting the taxpayer to look after them. Fortunately he had the pension to handle that expense.

These seem kind of contradictory to me - if the parents can get at it while she’s a minor it’s going to be under their control, at least in some respects.

Anyway, how old is your granddaughter- my grandchildren are 1 and 3 and there is no way I would put money in any sort of account that would irrevocably go to one of them, not now. Maybe if they were 15, but at their age, I have no idea yet what they will be like at 18. Maybe one of them will be the kind of kid who shouldn’t get thousands of dollars on their 18th birthday so whatever I set up for them will involve either their parent or me actually owning the account.

In Massachusetts an UTMA account only goes to the beneficiary at age 21.

I don’t know what the OP’s concern with the parents is, but in the case of my parents, they have an UTMA for our kid specifically because we are TOO conservative/responsible. We would pay for four years of college at any price, and maybe even graduate/professional school. We would not pay for a year traveling the world, or trying to be a professional golfer or actor. My parents think that’s extremely unreasonable of us.

I’d still have the same concern, that at their current ages, I have no idea what they will be like at 18 or 21 or 35 for that matter. I wouldn’t mind my money paying for a year of traveling the world or trying out acting or the PGA - but I very much doubt I will have that kind of money to give my grandkids. I’ll have closer to “buy a good used car” money - but I wouldn’t want to give a few thousand to a kid who will use it to finance their drug use/excessive drinking/gambling habit. I’m pretty sure that nobody has ever predicted that a 3 year old would grow up to be a gambler but obviously some of them do.

Then it seems like you want to have your cake and eat it too. You can’t give money to a minor (for legal and/or tax reasons) without giving up control. At least not schlubs like us with net worth in the six or seven figures.

I didn’t get the impression from the OP that tax reasons are an issue - and they aren’t for me. How much in taxes could I possibly save by putting a couple of thousand a year into an account that must go to the kid at 18 rather than putting it into some sort of account that I own with the kid as the beneficiary or simply waiting till the kid is 18 and then giving them a lump sum ? Not enough to worry about. Not even if I’m giving them $20K when they are 18 - there still won’t be any estate tax because my net worth is just barely 7 figures , not nearly high enough for estate tax to be an issue.

Also, I don’t have a problem with giving up control - I don’t want to give control to my grandchild on their 18th birthday . That’s not the same thing. I’m fine with my daughter and/or son-in-law having control. They are fully-formed people who are unlikely to pick up bad habits in their 30s.

The OP for some reason doesn’t want it to be under the parents control- but wants them to be able to get at it while she’s a minor. As far as I know , if the parent is the custodian of a custodial account they control it and can take money out if it’s for the benefit of the child while they are a minor - even to pay for tuition or braces. I’m not sure there is any way around that - other than the OP keeping control of the money, whether it’s an account that the granddaughter owns or not.

I don’t see the point in that at all then. The OP is free to give the money to the grandchildren when they become adults. No need for any kind of designated account.

Or if they want the psychological segregation, just open a separated bank or brokerage and put money into that.

I must be missing something.

If the money adds up to lets say $65,000 over 10 years and the grandkid gets it all at once it exceeds the gifting level and could cause a significant tax hit removing most of the money earned. Not to mention that while invested, the grandparent would be paying taxes on the earnings made.

The Custodial Investment Account avoids the tax issues completely.

If this was about <$32,000 than yes, minimal worries. But once it gets higher, a Custodial Investment Account starts to make a lot of sense.

What tax would be owed if the amount exceeds the gift tax limit?

It is whatever else they earned that tax year plus the amount exceeding the Gift Exemption. So while probably not a huge hit, it can be enough to counter investment returns assuming a moderate risk investment plan.

Yes, the grandparents will be paying taxes on the earnings, and yes, if a gift of more than the annual exclusion amount is made a gift tax return must be filed ( and the annual exclusion is per person so my husband and I could each give each of our grandchildren the exclusion amount each year) but there isn’t actually any tax due until the taxable gifts added to your estate exceed around $12 million ( scheduled to drop back to 5 million or so in 2026)

Sorry, I’m missing something. Any gift amount greater than the exemption gets treated as earnings I thought? Just like salary and earnings.

I thought this comes up semi-often when Grandma or Parents help out a youngish couple with buying their first home?

Please note: I mentioned the per person exclusion in the first response in the thread. Not sure why you brought it up like it was new information. That is why I used the $32,000 amount.

Nope- gift taxes aren’t paid by the recipient. They are paid by the donor (more accurately , it’s usually the donor’s estate) as they share the lifetime exemption amount and tax rate.

From this CBO document

By law, the gift tax has the same tax rate structure and exemption amount as the estate tax.7 A donor may give as many gifts as he or she chooses to each year; the donor pays taxes on those gifts only when the cumulative amount of annual gifts (above the annual per-recipient exclusion amount) during his or her lifetime exceeds the lifetime estate and gift exemption.

The 2022 exemption is $12.06 million. According to the CBO document

Among the 2.7 million decedents in 2016, about 13,000 estates were required to file a return—and of those, 5,500 estates owed taxes.

Not something most people need to worry about.

The only thing I know of regarding the home purchase is that banks used to want proof that the down payment “gift” is a gift and not a loan. And if the gift is more than the exclusion amount, the donor will have to file a gift tax return.

You did, but I was just trying to specify that each person has their own exclusion and the exemption isn’t $32K for one person and I didn’t remember that was in your first post.

No. The amount in excess of the annual exemption just goes against the lifetime exclusion of $X million, and is for 99+% of people, merely a reporting requirement.

Example, my parents who are NOT wealthy have given away over $300k over the last 25-ish years to their grandchildren most of which has been below the annual exemption. Cumulatively they have given under $100k in reportable gifts, and they are certain to die with many millions left in their lifetime exclusion accounting for both the gifts made and the remaining value of their estate.

There are people who make either a living or political capital out of the gift/estate tax bogeyman. My parents for example, who are both accountants for christsakes, are still not sure that they will not have their estate decimated by the tax man, because two of my siblings keep talking about it. Those siblings are rich enough to have estates over $20M, so it might be a legitimate concern for them, not for my parents who have never seen a million dollars and never will. And of course, there are estate planning attorneys constantly sending them mailers about protecting your estate from the Death Tax as well.