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Grandchildren and Gifts


From the moment your child broke the news about a baby on the way, you welled up with excitement, love, and hope.  During the baby’s first year, you were captivated by smiles, first steps, and the appearance of features that looked just like you.  The bond between a grandparent and grandchild is unique and powerful.  Grandparents cherish the time spent with their grandchildren – time that will be forever etched in the memory and the emotional development of the child. 

As grandparents think about their legacy and the ways they can show love and support even after their own lives end, it is important to consider the pros and cons of legal arrangements to give gifts to grandchildren.  Most people assume that a last will and testament is the estate planning document that they should use to leave money to support a grandchild. That may be the appropriate way to help a grandchild with living expenses until the grandchild finds his or her way in the world.  But grandparents should consider when they would like a grandchild to have control over money and property, how the gift will be taxed, and the effect on financial aid for higher education.

Last Will and Testament.  When a person leaves a gift to a child or grandchild in a will, it may be wise to include a built-in trust to hold funds for a minor child.  The trustee of that built-in trust may be the grandchild’s parent.  The funds may be used to support the grandchild’s health, education, and housing needs, but the benefit of the trust is that a minor is not the one deciding how to spend the money left as a gift by a grandparent.  Extensive research has concluded that a person’s brain does not fully develop until the age of 25 and decision-making by younger people can be more emotional than rational. 

Having an adult to approve the disbursement of money ensures that the money will truly help the grandchild.  A trust built into your will allows you to set the age or the conditions under which a grandchild gains control of the gift you leave.  Depending on the grandchild’s needs and personality, you may consider a staggered disbursement allowing the gift to pass to the grandchild in parcels at certain ages.  In 2021, the federal estate tax threshold is so high that most grandparents in Central Pennsylvania will not need to worry about taxes on a gift left in a will. There is, however, a 4.5% inheritance tax on the transfer of money from grandparent to grandchild. 

UTMA Accounts.  A grandparent may prefer to give a gift while the grandparent and grandchild are alive.  There is a common misperception that minors may not own property.  This is not true.  Using an account allowed by the Uniform Transfers to Minors Act, a grandparent can give an irrevocable gift to a grandchild.  The gift can include cash, stocks, bonds, or real estate.  Banks and financial services companies offer these accounts.  There are some advantages to using this approach. 

First, unlike with a will, there is no inheritance tax and the child does not wait to receive the gift until the grandparent dies.  Second, there are tax advantages to using an UTMA account.  The gift is being made with after-tax dollars of the grandparent, so there is no deduction available for making the gift, but the unearned income from the account is tax-free for approximately the first thousand dollars.  The next thousand dollars of income from the account is taxed at the child’s tax rate, which is probably a much lower rate than the grandparent’s. 

Third, there is some measure of control over how the money is used.  Although the money in the UTMA account is owned by the child, there is a named custodian who decides how to spend the money.  The custodian is held by the law to a certain standard of care with the management of the money and the money must be spent only in ways that benefit the child owner of the money.  Grandparents should be careful about how they transfer the money into the UTMA account, being sure to name the custodian and adding the words “as custodian for (name of minor child) under the Pennsylvania Uniform Transfers to Minors Act.”

There are some downsides when it comes to using UTMA accounts for gifts to grandchildren.  The law requires that the money must be transferred from the custodian to the child when the child reaches the age of 21, although an extension to age 25 is available under some circumstances.  Using a trust to make a gift to grandchildren would enable the grandparent to add protections beyond the ages of 21 or 25.  This is an especially important consideration when the gift involves large sums of money (say, $50,000 or more) or real estate, which may involve important management decisions that should be handled by a trustee. 

529 Plans. UTMA accounts are designed to hold a wider range of assets, but a 529 plan may be appropriate for grandparents who specifically want to help with a grandchild’s educational expenses.  529 plans are tax-advantaged accounts that may be used to pay for educational expenses from kindergarten through graduate school. 

There are generally two types of 529 plans: savings plans and prepaid tuition plans.  Money in a 529 savings plan grows tax-deferred, and withdrawals are tax-free if they are used to pay for qualified educational expenses.  Prepaid tuition plans allow a grandparent or parent to pay college tuition now at today’s tuition cost.  Given the upward historical trend in the cost of higher education, this may be an extraordinary gift to a grandchild.  Unlike an UTMA account, the money is not owned by the grandchild.  The grandparent setting up a 529 plan owns the money and the grandchild is listed as the beneficiary.  It should be noted that a child applying for financial aid will have to disclose the existence of an UTMA account, 529 plan, or trust.

Trusts.  There are reasons to consider using a stand-alone trust to make a gift to grandchildren.  For larger gifts of money, securities, or real estate, the tax advantages of an UTMA account offer a diminished value and it makes sense to enable a trustee to manage and invest the assets.  Trusts must file a tax return and financial planning is more complicated. 

Trusts not only allow greater flexibility and control over large gifts, but they are critically important if your grandchild has a disability.  Grandchildren with disabilities may or may not be able to work and earn income to support themselves.  If that is the case, public benefits such as Supplemental Security Income and Medicaid will be available for the necessities of housing, food, and health care.  Giving a financial gift directly to such a child will negatively affect the child’s benefits.  However, grandparents may use ABLE accounts and Supplemental Needs Trusts to make gifts that enhance the grandchild’s quality of life while not disrupting the grandchild’s public benefits.  Such trusts can be an important way to sustain a disabled grandchild for decades  https://keystoneelderlaw.com/planning-for-loved-ones-with-special-needs/.

The arrival of a grandchild is a life-changing event for grandparents.  With careful planning, that special bond can last as you help the grandchild from first steps to first apartment to first job. 

Patrick Cawley, Attorney