How Do Grandparents Leave Money to Grandchildren?

Grandparents often wish to provide financial support to their grandchildren, helping them navigate life’s significant milestones, such as higher education or starting a new career. This desire to contribute to the next generation’s future is a common and meaningful goal. Various financial strategies exist for grandparents to transfer wealth, each with unique implications for control, access, and taxes. Understanding these different approaches can help align a grandparent’s intentions with the most effective financial mechanism. This article explores several methods for gifting money to grandchildren, detailing their mechanics and considerations.

Methods for Direct or Custodial Gifting

Grandparents can provide financial assistance through direct gifts. An outright cash gift or transfer of property directly to a grandchild means the grandchild gains full and immediate control over the assets. This method provides no ongoing control for the grandparent over how the funds are used.

Alternatively, custodial accounts, specifically Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, offer a structured way to gift assets to minors. In these accounts, an adult, typically a parent or other trusted individual, acts as custodian, managing the assets for the grandchild’s benefit. The assets within a UGMA/UTMA account legally belong to the minor, meaning the grandparent cannot reclaim them once contributed. The grandchild gains full control of the funds upon reaching the age of majority, which is generally 18 or 21, depending on the laws of the state where the account is established.

Leveraging Educational Savings Plans

For those focused on educational support, 529 plans stand out as a tax-advantaged savings vehicle. A 529 plan is a state-sponsored investment account designed to help families save for qualified education expenses. Contributions grow tax-deferred, and withdrawals are tax-free when used for eligible costs, such as tuition, fees, room and board, and books at accredited institutions.

Grandparents can establish a 529 plan with a grandchild as the beneficiary, retaining control over the account and its investments. This control allows the grandparent to change the beneficiary to another qualified family member if circumstances change. The tax benefits, coupled with the flexibility to manage the funds, make 529 plans an attractive option for funding higher education without immediately transferring asset control to the grandchild.

Establishing Trusts for Grandchildren

Creating a trust offers a sophisticated and flexible method for transferring assets to grandchildren, providing a higher degree of control and customization. A trust is a legal arrangement where a grantor (the grandparent) transfers assets to a trustee, who then holds and manages those assets for the benefit of designated beneficiaries (the grandchildren) according to the terms of a trust agreement. This structure allows grandparents to specify precisely how and when their grandchildren receive the funds, such as at a certain age, for specific milestones like college graduation, or for particular purposes like starting a business.

Trusts can offer protection against creditors and ensure responsible use of funds, which might be especially appealing for larger gifts or for younger grandchildren. A revocable trust can be altered or canceled by the grandparent during their lifetime, while an irrevocable trust generally cannot be changed once established. An irrevocable trust typically removes the assets from the grandparent’s taxable estate, which can be beneficial for estate planning purposes, though it means relinquishing control over the assets.

Understanding Tax Implications

Gifting money to grandchildren involves several tax considerations for both the giver and the recipient. The Internal Revenue Service (IRS) allows an annual gift tax exclusion, which for 2025 is $19,000 per recipient. If a grandparent gives more than this annual exclusion amount to an individual grandchild in a year, the excess amount counts against their lifetime gift tax exemption.

The lifetime gift tax exemption for 2025 is $13.99 million per individual. Gifts exceeding the annual exclusion reduce this lifetime exemption, but no gift tax is typically owed until the cumulative lifetime gifts surpass this substantial threshold. Married couples can effectively double both the annual exclusion and the lifetime exemption. For example, a married couple can gift $38,000 to each grandchild in 2025 without tax implications.

Lifetime gifts can also impact a grandparent’s taxable estate, as the lifetime gift tax exemption is unified with the estate tax exemption. Any portion of the lifetime exemption used for gifts during life reduces the amount that can be passed free of federal estate tax at death.

A specific tax, the Generation-Skipping Transfer (GST) tax, applies to transfers made directly to grandchildren or other “skip persons” (individuals two or more generations younger than the donor) that bypass the intermediate generation (the grandparent’s children). The GST tax prevents avoidance of estate taxes across generations. It applies in addition to gift or estate taxes and has its own exemption, which for 2025 is also $13.99 million per individual. Transfers that trigger GST tax often require specialized professional advice.

For grandchildren receiving gifts, income generated from these gifted assets may be subject to the “kiddie tax.” This tax applies to unearned income, such as dividends, interest, or capital gains, for children under age 18, or full-time students between 19 and 23 who do not provide more than half of their own support. For 2025, if a child’s unearned income exceeds $2,700, the amount over this threshold is generally taxed at the parents’ marginal income tax rate, which is typically higher than the child’s rate. The first $1,350 of a child’s unearned income is typically tax-free, and the next $1,350 is taxed at the child’s rate.

Important Planning Considerations

When planning financial gifts for grandchildren, several practical considerations extend beyond the specific gifting method chosen. The impact on a grandchild’s eligibility for financial aid for higher education is a significant factor. Assets held directly in a grandchild’s name, such as in UGMA/UTMA accounts, are typically assessed at a higher rate when calculating eligibility for need-based federal financial aid (FAFSA), potentially reducing the aid package. Conversely, assets held in a grandparent-owned 529 plan are generally treated more favorably, with a lower impact on financial aid eligibility.

The degree of control a grandparent wishes to maintain over the gifted funds and when the grandchild gains access are also important distinctions. Direct gifts offer no control once made, while custodial accounts transfer control at the age of majority. Trusts provide the greatest flexibility in dictating distribution terms and maintaining control over the assets for an extended period.

Grandparents should consider the specific purpose of the funds—whether for education, a first home, starting a business, or general financial support—and choose a method that best aligns with that goal. Some methods are purpose-specific, like 529 plans for education, while others, such as trusts or direct gifts, offer broader utility. Flexibility to adapt to changing circumstances, such as changing beneficiaries or modifying distribution terms, also varies significantly by gifting method.

Finally, open communication with the grandchild’s parents about gifting plans can prevent misunderstandings and ensure financial strategies are aligned. Discussing these matters helps integrate the grandparent’s generosity into the family’s overall financial planning, avoiding unintended consequences or conflicts.