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Many grandparents love the idea of helping their grandchildren financially—whether it’s for college, a first home, or simply to give them a head start in life. But before handing over a check, it’s important to understand the tax rules that apply to gifts. Can grandparents give money to their grandchildren without triggering taxes? The answer is yes—but there are limits and guidelines you need to follow.
While seemingly simple, the mere act of giving can raise concerns about the tax repercussions. This is true; however, there are ways your grandparents can gift you money without taxing you so heavily. This step-by-step comprehensive guide covers many tactics and factors to consider in tax-efficient gifting so that more deductions will not lessen your gift to support loved ones financially.
Understanding the Annual Gift Tax Exclusion
The easiest and most frequent way people give money away with no tax due is through the annual gift tax exclusion. Under the IRS, it is possible to provide a particular sum every year to anybody without paying gift tax. In 2024, the annual gift tax exclusion will be $17,000 per recipient. That means a grandmother can give $17,000 per year to her grandchildren—without either one paying taxes on it.
For example, if both sets of grandparents want to give, they can pool their exclusions and gift up to $34,000 for each grandchild each year without having any tax effect. It’s a simple way of slowly transferring money without the IRS noticing. Any gifts exceeding the annual exclusion will just cut into your lifetime gift tax exemption, so you must plan carefully there.
How Much Can You Gift Without Paying Taxes?
Although there are limitations on how much you can give to each grandchild annually by the annual gift tax exclusion, the lifetime gift tax exemption is something else that counts. For 2024, people have a full exemption of $ 12.92 million for life. If you go over the $17,000 annual exclusion per grandchild, anything in excess would be treated as part of your lifetime exemption.
For example, if you give your grandchild a total of $20,000 a year, the first $17,000 would be exempt under the annual exclusion, and the other $3,000 counts against your lifetime exemption. It’s not until you make $12.92 million in total gifts that you would even start owing federal gift tax. This high exclusion enables large wealth transfers, particularly for wealthy families.
Read related blog: How to Leave Grandkids Your Retirement Savings
Utilizing the Lifetime Gift Tax Exemption
Flooding Trusts reduce estate and gift taxes but also flood out your potential to get the most from your estate. If you use money against your gift tax exemption, you cannot use that for your entire estate tax exemption. Balancing your gifting with the rest of your estate planning strategy is essential.
Setting Up Trusts for Tax-Free Gifting
The lifetime gift tax exemption is valuable for grandparents who wish to make large financial gifts. So, as you might expect by now, this is the portion of tax-free gifts for up to $12.92 million over a lifetime. This exemption can be a great tool if you believe the need will arise to move large amounts of wealth onto your grandchildren.
Using the lifetime exemption strategically can lower the value of your taxable estate and thus decrease estate taxes at death. For wealthier families, a lifetime gift may be beneficial as it lets you avoid or reduce estate (or generation-skipping) tax—another consideration if estate tax laws become stricter.
Leveraging 529 College Savings Plans
One of the best tools for grandparents to help fund their grandchild’s education is a 529 college savings plan. These plans come with tax benefits because the money grows tax-deferred, and you can take it out tax-free when you use it for qualified educational expenses.
Another wonderful thing about 529 plans is that you generate one enormous sum contribution that uses the present tax-free exemption for a few years. You can also “superfund” a 529 plan, which means contributing up to five years’ worth of the annual gift tax exclusion in one fell swoop — that generally amounts to $85,000 for an individual or $170,000 for a married couple. This enables grandparents to make an impactful gift without the imposition of gift taxes, given that no other gifts are made to the same beneficiary in the subsequent five years.
Read related blog: How to Get Money Out of a Business Tax-Free
Gifting Appreciated Assets: Pros and Cons
Grandparents who desire to leave their grandchildren money (or any other inheritance) could establish a pattern of gifting appreciated assets—stocks, real estate, or investments—instead of cash. This can be a good plan if the assets have gained a lot of value over the years.
Gifting Appreciated Assets: Your grandchildren will inherit that appreciated asset on its original cost basis. This could potentially lower future capital gains taxes when we eventually sell the asset, and it also provides an opportunity for grandparents to lower their taxable estate.
But there are potential drawbacks. So if/when the inherited appreciated asset is sold, or when a grandchild sells it, capital gains taxes may become due (dependent on income levels and the value of what is other than personal property). Of course, this strategy must be carefully evaluated according to the tax status of both donor and recipient.
Using Custodial Accounts for Minors
You may also use a custodial account, a Uniform Transfers to Minors Act (UTMA), or a Uniform Gifts to Minors Act (UGMA) account to give money to grandchildren. These accounts are held in trust until the grandchild comes of age, and they are titled in the name of a custodian (typically grandma or grandpa). However, when the child reaches 18 (sometimes older, if so stated), all assets will become that child.
The cash can be used flexibly for whatever the custodial beneficiary needs help with — it doesn’t have to be spent on education as is typically in a 529 or ESA. With a UGMA, the grandchild can’t access the money until he reaches the age of majority in his state (usually 18 or sometimes 21). This may save you from a lack of maturity-related disadvantage, given that not all brands are financially solvent.
Exploring Charitable Gift Funds
Charitable Gift Funds: If you are a grandparent interested in philanthropy and family gifting, a charitable gift fund may be for you. They allow you to donate in your grandchild’s name and teach them how donations can be fun while earning you some tax incentives.
Some methods, such as a donor-advised fund (DAF), allow you to make a contribution to a DDAF, take the tax deduction upfront, and suggest grants to different charities in the future. With the main objective of providing charity, it will also be a tax-deductible method to get the grandchildren involved in philanthropy.
Combining Gifts from Both Grandparents
Since the gift you give to your grandchild is higher than $ 14,000 (as stated in the example), both grandparents can apply their own $ 14,000 gift tax exclusion to maximize how much they can each give their grandchildren. So, for instance, if you and your husband/partner give $17k to each grandchild ( = almost $34k per year), no gift tax is triggered.
When combined with a more limited gifting strategy, such as seeding 529 plans or establishing trusts, seed money can be incredibly effective—particularly when applied to many grandchildren. This balances the gifts between grandparents and ensures the best tax outcome of money moves.
Read related blog: Can I Open A Savings Account For My Grandchild?
Consulting with a Financial Advisor for Tax Planning
Due to tax laws and estate planning, it is best to speak with a financial advisor or tax professional when you are looking to give money to your grandchild. An advisor can help you understand the options, consider everything, and structure a plan that suits your financial situation. Additionally, an expert will know the current tax laws and be able to help you update your strategy when they change. Whether it be trusts, 529 plans, or just giving cash—a pro can offer guidance and resources.
Beem, the financial app can help! This platform helps you navigate your taxes easily with its essential resources and tools. These tax resources bring you the latest information to answer all your doubts and find resources for your state, including tax rates, credits, and deadlines—all in one place.
Conclusion
Grandparents have multiple methods of giving money to their grandchildren without incurring a gift tax, such as annual exclusions and lifetime exemptions, trusts, and 529 plans. With knowledge of the rules and this handful of strategies, you can pass on the family fortune without needless loss to taxes. As always, every family is different, and you can read up on gift strategy more here to be sure your plan is tax-efficient and beneficial for all parties involved. Beem can help with figuring out your taxes and answer your queries. Download the app now!
FAQs on Can Grandparents Give Money to Grandchildren Tax-Free
How much money can grandparents give to grandchildren without paying taxes?
This way, over two grandparents may give away as much as $17,000 per year for each grandchild, all perfectly tax-free, because of the annual gift tax exemption. If both grandparents give, they can pool their exclusions for $34,000 per grandchild each year.
Are there any tax benefits to setting up a trust for grandchildren?
True, using a trust can be a tax-efficient planning form— especially for significant assets—but it is not for everybody. Living trusts were established to help grandparents transfer assets without incurring, or paying less, estate and gift taxes, and generation-skipping trusts theory trusts such as testamentary Q-tip trusts or GRATs.
What are the best ways to give money to grandchildren for education?
One of the best ways to give money for educational purposes is by contributing to a 529 college savings plan. They can grow tax-deferred until they are withdrawn to pay for qualified educational expenses, at which point the withdrawals are tax-free. You can also “superfund” a 529 plan by contributing up to five years’ worth at once and taking advantage of the annual gift tax exclusion.
