Gifts to grandkids: Can you afford to be more generous?

If you pass a dollar bill between the bars of your grandchild’s crib, he or she would likely tear it to shreds. In time they’ll learn what a dollar bill is—but not necessarily the value of a dollar. As Oscar Wilde almost said: Wealth is wasted on the young.

But sometimes, giving money directly to grandkids is the right thing to do.

With the rising cost of education and an increasingly precarious job market, your grandchildren may benefit from your generosity much more than your children.
The gender pay gap may be narrowing, but the generational wealth gap shows signs of moving in the opposite direction, leaving young peopleto face a more uncertain future. 
If you’re serious about estate planning, you should already have written a will—and your children’s children may be amply provided for. But by the time that will is executed, the grandkids may be all grown up and less in need of your beneficence—and may end up owing estate taxes to boot.

Can you afford to give more away?

It seems a bit perverse, accusing fixed-income retirees of giving too little of their nest egg away. We’re living longer, and the average couple will spend hundreds of thousands of dollars on healthcare expenses.
Despite these cold hard realities, studies do suggest that most retirees are being overly cautious with their assets. In fact, grandparents may be able to afford more gifting than they might feel comfortable with.
A 2016 study in the Journal of Financial Planning found the wealthiest fifth of U.S. retirees were spending 53 percent less than they could have (meaning that healthcare and other retiree expenses were factored in); the median retiree spent about 8 percent less than they safely should.1

Why aren’t retirees that have the means, spending more on loved ones?

One of the researchers, Christopher Browning, a Texas Tech University Professor, blames it all on a cognitive bias. Wealthier retirees are pessimistic about the future to an irrational degree—making them afraid to spend money (even on children and grandchildren). As Browning puts it, something happens when people retire. All of a sudden they’re not getting a regular paycheck, and are terrified to see their retirement account balances drop even a tiny bit. But they can probably afford to be a bit more generous.
What to say

Gifts can reduce your taxable estate

It has been said that the manner of giving is worth more than the gift. In terms of federal taxes, the way you give is certainly worth focusing on—it could save your family thousands of dollars.
Remember, you may give a cash gift of up to $15,000 per grandchild in 2018 (or $30,000, together with your spouse)—or any other person, for that matter, without there being any tax consequences.2 Depending on how many grandchildren you have, you could reduce your taxable estate by a considerable amount. Be sure to check each year whether these maximums have changed in any way.
There aren’t many loopholes beyond that, but covering a loved one’s tuition expenses (by paying a college directly) is one way to give above and beyond that annual limit, without triggering any gift tax consequences. So, if you’ve already given $15,000 to a college-age grandchild, and don’t want to reduce your $5.6 million lifetime gift tax exemption limit, consider helping them out by paying tuition directly.
If you have a substantial amount of money, gifts are a strategic way to pare down your estate during your lifetime, potentially sidestepping estate tax after your death (which could be as high as 40% for estates above $5.6 million).
Whether you choose to gift money to a grandchild and bypass a parent in the process, all depends on the grandchild, i.e. how mature they are. Perhaps ask yourself and respond honestly, whether there is a risk of them squandering it. In the end, it may be wiser to keep their parents involved, if nothing else, to keep a watchful eye over how the money is spent or invested.

Regardless of how you choose to bestow your wealth, you’ll definitely get a kick out of helping a grandchild. And surely that’s something you want to savor during your lifetime.

1 “Rich Retirees Are Hoarding Cash Out of Fear” (Bloomberg.com, May 2017).
2 Annual gift tax exclusion amount and lifetime gift exemption amount are subject to rise each year, in line with inflation. The IRStypically announces official inflation adjustments in late October.
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January 5, 2018
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