Can Grandparents Give Money to Grandchildren Tax Free?

Can Grandparents Give Money to Grandchildren Tax Free?

How Much Money can a Grandparent give a Grandchild Tax Free?

 

 

Can Grandparents give money to Grandchildren tax free? Yes, but it takes some planning and understanding the tax code.

As to how much money a grandparent can give to a grandchild tax free, well, the number depends on what kind of tax you are talking about. Let’s dive in!

 

Can Grandparents Give Money to Grandchildren Estate Tax Free?

If we are talking about estate taxes, then answer is almost certainly yes! You could give a child almost $11.8M in 2022 and that would be estate tax free. That’s right, the estate tax exemption is huge right now, so you could use up your entire unified estate and gift tax amount in a single year in a gift to a grandchild.

The yearly gift limit is $15k per person. If you and your spouse want to split a gift, you could give any single grandchild $30k a year. Though you would have to report it as a gift-split on your taxes, this would be a tax-free gift to a grandchild.

Let’s look at some other taxes.

 

Can Grandparents Give Money to Grandchildren Capital Gains Tax Free?

The basis on capital gains  carry over with the gift. You cannot transfer a gift and expect to escape capital gains.

Never gift losses, as losses don’t transfer. If you have a loss asset, sell it and take the loss for tax purposes, and then transfer cash. If you have a highly appreciated asset, then you can transfer it, but the basis transfers with it.

For example, if you give them $15k of ABC stock with a basis of $5k, you have transferred the basis over with the gift. If they file their own taxes, they may very well be in the zero percent long term capital gains tax bracket, and they could sell the stock capital gains tax free.

This is called downstream gifting, and is very effective when grandchildren are initially filing their own taxes but not yet making a lot of money. Watch out for the kiddie tax, however, if they are still on their parent’s tax return!

There is also upstream gifting where you give a grandparent a gift of a highly appreciated asset because you know one day they will pass on and pass back the asset with a step up in basis.

Let’s look at some other ideas when it comes to tax fee gifts to grandchildren.

 

What are the Best Gifts to Give Tax Free to Grandchildren?

Direct Payments

This is important! A Grandparent can Pay a Grandchild’s college or medical bills without any tax implications. There is an unlimited amount of college or medical cost you can pay for, as long as you directly pay the college or hospital (don’t give it to the child to pay the bills).

Cash

Cash is the most common gift, but they will pay ordinary interest on any gains in a savings account (etc).

529 College Savings Plans

College savings is a great idea for most grandparents. There is a $15k limit every year, but you can superfund 5 years worth ($75k) in any one year. So two grandparents could fund $150k at once (for a five year period) into a 529 for a child. This can be used to pay many college expenses, but also some expenses before college as long as they qualify.

And don’t forget, a 529 plan can be used as a bonus saving account!

Finally, remember some states have a state income tax benefit yearly for funding 529 plans for grandchildren. You can get a state income tax write-off and yet have the tax-deferred goodness of a 529 plan.

Can Grandparents give money to Grandchildren tax free? YES Use a Roth IRA

Perhaps the best way grandparents can give money to grandchildren tax free is to help them fund a Roth IRA, if the grandchild has income reported to the IRS. Even if they spend their money, if they report qualified income to the IRS, you can set up a Roth IRA for them in the amount of the income, up to the $6K Roth IRA limit. This is the best way you can give them tax free money!

Fund a Employer Retirement Plan

If grandchildren are working, but cannot afford to put money in their 401k, a grandparent could give them the money to spend and have them increase their deduction into the 401k. After all, money is fungible, and it doesn’t care where it comes from.

Better yet if they have a Roth 401k option, fully funding that with $20k a year is a great tax free gift to your grandchildren!

Be the Bank; Give Grandchildren a Loan for Home Purchase

When grandchildren are ready to buy a home, you could offer to be the bank. Though you need to draw up formal loan documents and charge at least minimal interest amounts (as determined by the IRS), this is a great way to save them some interest and yet have a bond alternative for grandparents.

Education

Education is the best tax free gift grandparents can give grandchildren. Consider A Simple Path to Wealth as a starting point.

 

Other Ideas

Custodial Accounts (UTMAs and UGMAs) are custodial account that can be opened at most custodians. You can manage them until the grandchild turns the age of majority (18, 21 or 26 – it is state dependent), but it does become their asset when they reach the magic age. Prior to that, while they are still on their parent’s tax return, custodial accounts can be very tax efficient. If the growth is less than ~2k a year, then there is minimal taxation and the income does not stack on top of the parent’s income.

Inside, make sure you use low-cost broadly diversified index ETFs to demonstrate good behavior to them. No individual stocks!

Cryptocurrencies. Just staying, they are going to do it anyway, why not start young and give them some crypto?

Experiences With You! Perhaps the best gift to give is a time with you! Grandparents can take grandchildren on yearly trips, or save up for something special. This is the best tax free gift that grandparents can give to grandchildren!

 

Inappropriate Gifts for Grandparents to Leave Grandchildren

I would suggest you don’t give cash for them to leave in a savings account, unless they have goals in the immediate future. While a grandchild must earn, save, and then invest, unless you teach them how to invest—who will? Investing in something more than a savings account is the true blessing you can leave a child.

And we all know that children will make mistakes with their money. We all did. The hope is that they make the mistakes early in life rather than with extra zeros at the end later in life.

Similarly, I don’t suggest series EE- or I-Bonds as gifts to grandchildren. These, while hopefully they will keep pace with inflation, will not grow over time and bless grandchildren like equities will. I suggest a savings bond gift alternative such as stocks, or even better low cost broadly diversified ETFs.

Also, do not give gold or other precious metals. While coins can be a fun gift, there is no learning you are giving them, aside from how to get a haircut when you lose it or try to turn it into cash.

Finally, life insurance for grandchildren is just plum a bad deal. There are indications for permanent life insurance, but a child has no indication.

 

Conclusion—Can Grandparents Give Money to Grandchildren Tax Free?

So, the best tax-free gifts you can give your grandchildren are education, and experiences!

If you want to focus on monetary gifts, Roth IRAs, 529s and contributions to employer retirement plans can all be nice tax free gifts.

If the concern is estate tax, well, just keep under the $15k yearly exclusion amount, or go ahead and use up some of your lifetime exclusion if you don’t have a massive estate.

Meanwhile, you can’t help them escape ordinary taxes, unless you give them cash to help pay the taxes if they fund a Roth IRA or Roth 401k. Capital gains transfer with the gift, so there is a creative way to pay less in taxes if you gift assets between the generations.

Grandparents can give money to their grandchildren tax free but it does take some advanced understanding of all the tax rules.

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2 Comments

    • Right, sorry, I hit the wrong button and it went crazy. I’ll have it fixed in the new years. Sorry about that!

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