Overheard recently: one fellow says to another, “I don’t know how to thank you.” The other fellow says, “That stopped being a problem when the Phoenicians invented money.” That may be a snappy comeback, but it’s also true that financial gifts almost always come in handy: they’re always the right size, they never go out of style, and they match perfectly with everything. And as we approach the season of gift-giving, providing a financial gift may be a way for grandparents with the means to not only provide a financial boost for the younger generation, but also to create an opportunity to pass along a bit of financial savvy at the same time.
After all, grandparents can still have an important role in passing along lessons learned about money and finance to an even younger generation. In fact, because many grandparents have a less discipline-based relationship with their grandchildren than they had when they were raising their own offspring, they may have better and less stressful opportunities to talk to grandkids about money basics. Sometimes, kids will listen to their grandparents in a different and more receptive way than they do their parents. This can offer grandparents a perfect chance to get important financial lessons into young, eager minds.
Encouraging young people to save and invest is one of the best and most valuable lessons we can teach. So, let’s look at a few ways to go about it.
Take advantage of the annual gift tax exclusion.
We wrote recently about the potential sunsetting of the higher estate tax exemptions conferred by the 2017 Tax Cuts and Jobs Act. Some individuals with estates in the potential “red zone” for the lower exemption may wish to consider ramping up their annual gifting strategy. In 2023, you can give away up to $17,000 to any individual without incurring gift tax, including each of your grandchildren (couples can combine their annual gift exemptions and give away $34,000 to each). And there are several ways you can turn this gift into “teachable moments” for grandchildren and others.
- Fund a 529 education plan. Assets placed in a 529 savings plan grow tax-free, and when withdrawn for a qualified educational expense, they are not counted as taxable income. This offers a prime opportunity to talk about the benefits of compounding and growth along with the desirability of shielding the growth from taxation. Adding to the account each year gives you a chance to revisit the topic with the grandchild, observe the performance of the assets in the account, and keep the conversation going.
- Set up a Roth IRA. As long as the grandchild has earned income (less than $138,000), you can fund a Roth IRA in the grandchild’s name, up to the full amount of their earned income. This is another way to provide the gift of tax-free compounding and growth and also teach the grandkids about the advantage of saving over a longer period of time.
- Open a Uniform Gift to Minors Account (UGMA). You can deposit cash or securities in a UGMA and appoint yourself or another trusted person or entity as trustee. Income generated by the account is taxable after the first $1,250 (in 2023), but only at the “kiddie rate,” up to $2,300. A UGMA can hold stock, bonds, or mutual funds, offering the grandchild a first-hand experience with seeing how the financial markets work. When the child reaches the age of majority, control of the account will automatically revert to them.
Gift stock or mutual funds.
Transferring ownership of appreciated stock or mutual fund shares can be a way to avoid capital gains while also benefitting someone you love. As mentioned above, the assets can be held in a UGMA or, in some cases, in a 529 plan (most plans do not allow individual stocks). There are several ways to make the gift, ranging from large amounts down to fractional shares.
- Use a trust. If your intention is to make a major gift to one or more grandchildren, you may want to consider the use of a trust. The trust can be structured to provide greater control over access (for example, when the child reaches a certain age), which can provide greater assurance that the gift will be used wisely.
- Set up an online app. Especially for “digital natives” (which most grandkids are), a stock purchasing app can be a great way to interest them in the world of investing. Apps like Stockpile, Acorns Early, and others allow kids to buy and sell microshares (or larger amounts) in a UGMA account with parental controls. They can invest in companies they are familiar with as brand names (think Netflix, Amazon, Disney, etc.) and get hands-on experience at the same time.
However you decide to go about it, making a financial gift to your grandchildren should also be seen as an opportunity to pass along basic financial knowledge, providing a foundation for the child’s further understanding. By introducing them to the saving and investing mindset early in life, you’re also giving them the durable, lifetime gift of financial literacy, which they can apply in whatever endeavors they undertake in the future.
At Aspen Wealth Management, we take seriously our responsibility to not only help our clients manage and invest wisely, but also to provide expertise and strategies for passing along important financial values. To learn more, visit our website to read our article, “Family Philanthropy: Building a Solid Foundation.”