The relationship between grandparents and grandchildren is uniquely cherished, and you want to do what you can to give your grandchild a good life. Gifting money to grandchildren can set a strong foundation for their financial future and serve as a valuable
Whether you're gifting cash or assets, you'll want to ensure your contribution can make the positive difference you intended—without excessive taxes or concerns about financial responsibility getting in the way.
Tax implications when gifting to grandchildren
Gifting money and assets to your grandchildren can be a great way to help fund their college, a marriage or other life milestones. You may want to give them an infusion of cash, or you may decide to give other assets, such as stocks, bonds, or real estate. In any event, there are certain tax considerations worth thinking through before making transfers.
For instance, you may encounter a
Annual gifting exclusion limits
The IRS will let you give a certain amount of assets per year to any number of people without facing the gift tax. This is known as the annual exclusion, and it's $17,000 per recipient in 2023.
In other words, you can give up to $17,000 per grandchild without worrying about tax implications or filing a
If you give more than the annual limit, you must fill out the gift tax return. While it won't necessarily mean you'll owe taxes, the amount over the annual exclusion limit will count toward your lifetime exemption.
Lifetime gifting exemption limits
The lifetime exemption caps the total amount of money and other assets you can give away before needing to pay
This is where previous gifts over the annual limit can come into play. Say your total gifts were $1 million over the annual exemption amount in a previous year. Not only would you have been required to file a gift tax return to report those gifts to the IRS (even though you may not have had to pay taxes on that amount), your lifetime exemption in 2023 would be reduced to $11.92 million.
There are also ways to give more than the annual limit without affecting your lifetime exemption:
- Medical expenses and tuition. Paying for your grandchild's medical expenses or school tuition doesn't count toward your annual or lifetime limits as long as you make the payment directly to the medical provider or educational institution.
- Superfunding a 529 college savings plan. This tax-advantaged savings plan can be used to cover college and K-12 tuition and certain other education-related expenses. "Superfunding" means making a lump sum gift to a
529 planof five times the annual exclusion limit (in 2023, that would be up to $85,000). The limit can be doubled if parents or grandparents make the gift. You have to file a gift tax return, but on that return, you would elect to prorate the gift as if you'd given it over five years. Note that any additional gifts to that beneficiary within those five years may be taxed and will reduce your lifetime exemption amount since you'd be going over the annual exclusion limit.
Generation-skipping tax exemption
Potential tax burden on gift recipients
While in most cases, the giver of the gift will shoulder the tax burden, there are times when the recipient could end up paying.
For instance, your gift may have
The possibility of the beneficiary paying taxes on gains also is true if you give assets in indirect ways, such as through a trust.
Aside from federal taxation, certain states also levy an
Other considerations when gifting to grandchildren
Taxes are only one factor that can affect your generational gift-giving decisions. Here are some others to think about:
Your long-term finances
Before you bestow large cash gifts or significant assets upon your grandchildren, evaluate how it will impact your financial stability. Make sure your generosity doesn't put you at risk of running out of money in retirement.
Your grandchild's age & maturity level
You likely want your gift to be used effectively, and part of that may depend on whether the recipient can legally and realistically take control of it.
If you're giving to a minor, a custodian (typically a parent or guardian) will need to handle the asset until your grandchild reaches custodial termination age. Even if your grandchild is old enough, they may not be mature enough to handle financial responsibility. If you have concerns, you may want to delay your gift or look into
Your approach to the gifting timeline
With your grandchildren's age and financial situation in mind, you'll want to weigh whether it's better to give the cash or asset to them all at once or distribute it over time.
For example, if you have grandchildren who are just getting started with their careers, they may not have much savings. You may want to gift them a large sum to help with a down payment on a home or cover other immediate needs.
On the other hand, if your grandchild is younger, spreading out cash payments or asset access over time may be a better option. This can ensure the gift lasts for a long time, and it could present an opportunity for them to experiment with financial responsibility incrementally—which could serve them well beyond the extent of the gift.
Your gift's use & usefulness
There may be certain kinds of gifts, such as contributions to a 529 education plan, where you need to think through what would happen if your grandchild doesn't use it. In the case of
Criteria to move unused 529 plan funds to a Roth IRA:
- The 529 beneficiary must be the IRA owner and will have to have earned income.
- Rollovers will be subject to the annual Roth IRA limits in the year they are rolled, less any contributions you've previously made for the year (for example, 2023 limits are $6,500 under age 50; $7,500 age 50 or older).
- 529 must be at least 15 years old.
- Any contributions or earnings from the past five years are not eligible to be rolled into the Roth IRA.
- The lifetime maximum of funds rolled over is $35,000.
But other gifts that the recipient, for whatever reason, doesn't need or doesn't want may be complicated to transfer to someone else and could force them to incur excess taxes or costs. If you're unsure if your gift could have unwanted implications, you may want to run the idea by your financial advisor or a tax or legal professional.
Talk through your generosity plans
Gifting money and assets to your grandchildren and great-grandchildren is a kind, thoughtful gesture that helps you live your generosity values, but it requires careful planning. Consider your financial stability, gifting limits and the abilities of your grandchild before making any financial moves.
Talking to your family and a