Considerations for gifting money to grandchildren

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 estate planning tool for yourself. It's also a way to pass down your values, including generosity, to the next generation.

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.

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 gift tax, which applies to assets given to others while you're alive, or an estate tax, which applies to assets that you own at the time of your death. Depending on the cash amount or property valuation, these taxes can range from 18% to 40%. But both gift and estate taxes have certain exemptions that can help lessen the tax burden.

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. For 2023, the annual limit per recipient is $17,000 and for 2024 it's $18,000.

In other words, you can give up to annual limit per grandchild without worrying about tax implications or filing a gift tax return.

For example, if you have two grandchildren, you could give each of them up to $18,000 in 2024 for a total of $36,000 without paying taxes on it. That limit applies per person, so a married couple could give up to $72,000.

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.

The lifetime exemption caps the total amount of money and other assets you can give away before needing to pay federal estate taxes. For 2023, the lifetime exemption is $12.92 million and for 2024 it's $13.61 million. This means if you died in 2024, you could have gifted up to $13.61 million—including gifts while you were alive as well as gifts after your death—without incurring a federal estate tax.

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 2024 would be reduced to $12.61 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 plan of five times the annual exclusion limit (in 2024, that would be up to $90,000). 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.

The generation-skipping tax also may come into play when you're gifting directly to your grandchildren. It's a tax that first was put into place to close a loophole that used to let people pass money to their children's children but only pay taxes once. Now, if you pass assets to your grandchildren that exceed the total lifetime exemption, you may have to pay gift/estate taxes plus an additional generation-skipping tax of 40% on the overage.

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 capital gains tax implications. Say you give stock that's valued at $10,000 to your grandchild while you’re living. These shares are ones you purchased years ago for a total of $1,000—that's your basis in the stock and will become your grandchild's basis as well. If they immediately sell the stock, they'll owe taxes on the $9,000 capital gain—the $10,000 sales price minus the $1,000 basis.

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 inheritance tax that a gift receiver would have to pay if they're given something from a deceased person's estate. Spouses, children and other close family members may be exempt, and sometimes an estate isn't large enough to incur the tax, but those exceptions depend on the state's specific rules.

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Taxes are only one factor that can affect your generational gift-giving decisions. Here are some others to think about:

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.

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 setting up a trust fund for grandchildren that gives you more control over how the assets are managed and used.

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.

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 unused 529 funds, there are some clear options, including changing the beneficiary to another family member or rolling over the funds to a Roth IRA.

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, 2024 limits are $7,000 under age 50; $8,000 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.

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 financial advisor before gifting money or assets is crucial. Discuss how you want to distribute your assets and the reasoning behind your decisions. This conversation can help to ease any confusion in your family and structure your gifts in the most financially sound and tax-advantaged way possible, for you and your grandchildren. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.