If you are in your “golden years” and are looking for ways to spread your wealth, you should consider the various tools that will allow you to financially protect and benefit your grandchildren. Carefully planning your gifts to your grandchildren is not only a generous act, but can also be a financially wise move in your estate planning and in growing your overall family wealth as well.
So, where do you start with your gifting? You must consider how much you are comfortable with giving. Currently, the Internal Revenue Service permits you to gift up to $16,000 per year, per beneficiary, tax-free. This amount can be doubled to $32,000 if you are married and both spouses make a gift. As you can see, you can gift a substantial amount free of the gift tax, but it is important to confirm that you can afford to do it without it having a negative financial impact on you.
What are the ways to wisely “gift” part of your wealth to your grandchildren? Of course, you could simply hand over a check to them, but that doesn’t provide you with any estate planning benefits nor does it incentivize or encourage your grandchildren to grow that wealth instead of just spending it. Here are several other options you should consider:
Establish and deposit the money into a tax-favored 529 Plan
A 529 Plan is an account created to pay for your grandchild’s educational expenses. You can add money to this fund as you can afford it and there is typically a state tax credit for your donations, but not here in Hawaii. Due to the lack of a state tax incentive to create an account in Hawaii, it's not uncommon for locals to establish accounts in other states with more favorable terms such as lower annual fees. Note that your grandchild isn't required to attend school in that state.
Create and fund a “Wealth Creation Trust” for the benefit of your grandchildren
A “Wealth Creation Trust” provides you with substantial flexibility to control, invest, and protect the gifted money for the benefit of your grandchildren as well as incentivizes them to grow the gift instead of squandering it.
Set up a custodial bank account for each grandchild to hold the funds
This is basically the same as an outright gift and not advised as this account will be at risk from their creditors, lawsuits, bankruptcies, and future divorce.
Purchase a life insurance policy with a cash-value component
Name your grandchild the beneficiary of a life insurance policy. If you use this strategy, consider using an Irrevocable Life Insurance Trust to own the life insurance so it remains outside of your estate and their estate for successive generations.
Explore the opportunities offered by websites such as Upromise and Babymint
These websites allow members to accumulate rebates on items purchased at participating stores and direct those funds into your grandchild’s 529 account or wherever else you choose. Over time, these funds can grow into a substantial amount.
The above list is just a few examples of ways you can provide for your grandchildren’s financial future while also obtaining a tax benefit.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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