The Bank of Grandma and Grandpa


The phrase "generous to a fault" certainly applies to America's grandparents. AARP reported that over a third of grandparents say they spoil their grandchildren by "buying them too much." And the aggregate spending on grandchildren is now over seven billion dollars and climbing fast. Part of the reason for this largesse is the wealth of Baby Boomers and beyond. They are better off than earlier generations so they have the wherewithal to make significant gifts and their recipients of choice are often the grandchildren.
Holidays and birthdays are the usual occasions for transferring cash, but surveys show that over half of all grandparents also help out with tuition and school supplies and over a third pitch in to defray day-to-day living expenses. Sandra Timmerman of the MetLife Mature Market Institute says, "[Grandparents] are not interested in holding back and saving the gifts for inheritances. They'd rather give smaller gifts now and see the fruits of their labor being used." MetLife found that only 21 percent of Boomer grandparents specify gifts to the grandchildren in their will.
As the grandchildren get older, their expenses get greater. Unsurprisingly, their parents welcome all the help they can get thanks to the soaring cost of higher education. College costs have risen 120 percent in recent decades, leaving many parents—who may still be paying off their own student loans—with nowhere else to turn but the grandparents. Fidelity Investments found that more than half of all grandparents who earn high five figures or more already do or plan to start saving to help put their grandkids through college. And you can forget the $100 U.S. Savings Bond gift to a graduate. Now, grandparents expect to contribute a median $25,000 and many are putting away $50,000 or more.


If you, too, want to help out your grandchildren, there are basically three ways to do it. The first is an outright gift of up to $15,000 ($30,000 for a married couple) without paying a gift tax. According to the IRS if you write a big check, gift some investments or give a car to someone other than your spouse or dependent, you have made a gift. The IRS has a gift tax limit, both for the amount you can give each year and for what you can give over the course of your life. If you go over those limits, you will have to pay a tax on the amount of gifts that exceed them.
The second is setting up the qualified tuition plan know as a "529." Sponsored by states, state agencies, or educational institutions, these college savings plans are a form of mutual funds in which earnings grow tax-deferred and withdrawals are free from federal taxes if they're used for higher education. However, if you pull money out of a 529 for anything other than college, the earnings will be taxed as ordinary income plus a 10 percent penalty.
The third way to help your grandchildren is by setting up a custodial account. This money doesn't have to be used for college tuition, but the experts suggest you confine it to that. There are no tax breaks on a custodial account and, when your grandchild reaches his majority (defined by his/her state as 18 or 21), the money belongs solely to him. Alas, some grandparents get a nasty shock when they find out that some of their hard-earned money has gone toward a spring break getaway to Ft. Lauderdale! As valuable as the above-mentioned accounts are, be aware that they can sharply reduce your grandchild's financial aid, since that money is counted as an asset when applying for loans and grants.
Richard Eisenberg, author of How to Avoid a Mid-Life Financial Crisis, further advises, "If you do want to put money away for your grandchild's future college bills, I'd suggest setting up an automatic program that funnels the same amount from your checking account into the 529 or custodial account every month. This way you won't need to remember to make the gifts and you'll likely find it easier to part with the cash in dribs and drabs than by writing a giant check once a year or so."
Finally, when gifting grandchildren the experts say it's best to specify the way the money should be used or make the purchase or payment yourself. Above all, they caution, don't bail the kids out of debt. That might just encourage them to keep spending, secure in the knowledge that you're there to backstop them. Instead, talk with your grandkids about developing the sensible attitudes toward saving and spending money that will stand them in good stead throughout their lives. Giving them the benefit of your experience might be the most valuable gift of all. Unfortunately, says MetLife's Sandra Timmerman, "We've found it easier for grandparents to give money than to give advice."

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