Grandparents Can Shape Futures with Strategic Gifting

A projected transfer of wealth amounting to $124 trillion is expected to take place before 2048, with $105 trillion earmarked for heirs and $18 trillion designated for charitable contributions, according to research from Cerulli Associates. This significant wealth transfer primarily involves nearly $100 trillion that will come from baby boomers and older generations, accounting for 81% of all transfers. For grandparents looking to support their grandchildren, gifting can provide not only financial assistance but also potential tax advantages.

Gifting to grandchildren serves multiple purposes. It can help establish a solid financial foundation for their future while also reducing the size of the grandparents’ estate and associated taxes upon their death. This allows grandparents to pass down values such as generosity while they are still alive.

Several factors should be considered when implementing a gifting strategy. First, assess the age of the grandchildren. The appropriateness of the gift can depend significantly on whether the grandchildren are under 18 or older, as this will influence how and when they can access the funds.

Another crucial consideration is the financial responsibility of the grandchildren. It is essential to evaluate whether they have the acumen to manage the money effectively. Strategies can be implemented to ensure that funds are used wisely and responsibly.

For grandchildren with disabilities, gifting requires careful planning. Meeting with an attorney who specializes in disability planning is advisable to ensure that gifts do not adversely affect eligibility for government benefits.

As of 2025, the IRS has raised the annual gift tax exclusion to $19,000. This amount can be given to each individual, including grandchildren, without necessitating any gift tax reporting. Married couples can combine their gifts, allowing them to give up to $38,000 without tax implications. Any contributions exceeding this annual limit will count against an individual’s lifetime federal gift tax exclusion, which is $13.99 million in 2025.

529 Plans: A Smart Educational Investment

One effective way for grandparents to save for their grandchildren’s education is by contributing to a 529 plan. These plans allow assets to grow tax-deferred, and withdrawals for qualified college expenses are tax-free. For instance, if a grandparent funds a 529 plan with $5,000 at an annual return of 6% and makes additional contributions of $100 monthly, the account could grow to $20,559 in eight years and $53,584 in 18 years.

For those wishing to contribute more than the annual limit, the “superfunding” strategy allows grandparents to frontload a 529 plan by making contributions equivalent to five years’ worth of limits in one go. This means a grandparent could deposit up to $95,000 for a single beneficiary today. For married couples, this contribution can double to $190,000 without tax consequences.

As an example, two grandparents with ten grandchildren could reduce their estate by $1.9 million in a single day through superfunding, all while avoiding the use of their lifetime exemptions. Additionally, new rules effective from the 2024-2025 academic year stipulate that 529 plans owned by grandparents will no longer affect a grandchild’s financial aid eligibility.

Furthermore, should there be remaining funds in a 529 plan after college, a grandchild can convert up to $35,000 to a Roth IRA for their retirement, subject to specific conditions.

Utilizing IRAs for Young Earners

If a grandchild is earning income, grandparents can also contribute to a custodial traditional IRA on their behalf. The contribution limit for those under 50 in 2025 is $7,000. These funds will grow tax-free until required minimum distributions kick in at age 75 for individuals born in 1965 or later. Withdrawals can be made without penalty after age 59½.

Similarly, custodial Roth IRAs can be established for grandchildren, provided they have reported earned income. Contributions made to these accounts grow tax-free, and withdrawals can be made tax-free at age 59½.

Custodial accounts can also be set up under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). These accounts allow grandparents to provide financial gifts that can help teach children about investing. Managed by an adult until the child reaches the legal age of majority, custodial accounts can be established at various financial institutions.

In 2025, children under 19 (or full-time college students under 24) are considered dependents for tax purposes, with the first $1,350 of unearned income being tax-free, and the next $1,350 taxed at the child’s rate. Amounts exceeding $2,700 will be taxed at the parent’s rate.

As grandparents consider financial gifts for their grandchildren, it is vital to understand the implications of each gifting strategy. Gifting not only strengthens family bonds but also lays the groundwork for a solid financial future for the next generation.

Financial expert Teri Parker, a certified financial planner and vice president at CAPTRUST Financial Advisors, emphasizes the profound impact that thoughtful gifting can have on families. For more information, she can be contacted at [email protected].