What Is the Best Way to Give Grandchildren Money?

Grandparents often provide financial support to their grandchildren for immediate needs, education, or long-term security. The chosen approach depends on specific objectives, such as current expenses, college savings, or a future nest egg. Each method carries distinct characteristics, including control, tax implications, and administrative requirements. Understanding these options helps in making informed decisions.

Direct Cash and Expense Payments

Direct cash gifts are the most straightforward way to provide financial assistance. Individuals can give up to a certain amount each year without incurring gift tax implications or needing to file a gift tax return. For 2025, the annual gift tax exclusion limit is $19,000 per recipient. Married grandparents can combine their exclusions, allowing them to gift up to $38,000 to each grandchild annually without triggering gift tax reporting requirements.

Gifts exceeding this amount require the donor to file IRS Form 709. The excess is subtracted from the donor’s lifetime gift tax exemption, which is $13.99 million per individual for 2025. This unified credit means most individuals will not pay federal gift tax during their lifetime.

Beyond cash, certain direct payments for specific expenses are also exempt from gift tax. Payments made directly to an educational institution for tuition or to a medical provider for qualified medical expenses are excluded. These exemptions benefit grandparents covering significant education or healthcare costs without impacting their annual or lifetime gift tax exclusions. Direct cash gifts, however, transfer immediate control of funds to the grandchild or their parents, offering no ongoing oversight.

Custodial Accounts

Custodial accounts, established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), provide a structured way to give money to minors. These accounts are typically opened at a financial institution, with an adult designated as the custodian. Assets are legally owned by the minor, but the custodian maintains management and investment control until the minor reaches a specified age.

The age at which assets transfer to the grandchild, known as the age of majority, varies by state. It is commonly 18 or 21, but some states allow for transfer up to age 25. Once the minor reaches this age, they gain full legal control over the assets, with no restrictions on use. This transfer of control is irreversible and automatic.

Investment earnings in a custodial account are taxed to the child. For higher income levels, these earnings may be subject to “kiddie tax” rules. For 2025, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s rate, and income exceeding $2,700 is taxed at the parents’ marginal rate. This rule aims to prevent parents from shifting income to their children to take advantage of lower tax brackets. Assets in a custodial account are generally considered student assets for financial aid eligibility.

Establishing a custodial account typically requires the grandchild’s Social Security number and the custodian’s personal details. The custodian is responsible for managing investments responsibly and acting in the minor’s best interest. Record-keeping is important for tax purposes.

Education Savings Plans

Education savings plans, particularly 529 plans, are widely used vehicles for funding future education expenses. A 529 plan is a qualified tuition program that offers tax advantages. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. The account owner, often the grandparent, retains control over the account and can change the beneficiary if needed.

Qualified education expenses eligible for tax-free withdrawals include tuition, fees, room and board, books, and required supplies at eligible colleges, universities, and vocational schools. Up to $10,000 per year in K-12 tuition can be paid tax-free from a 529 plan. As of July 4, 2025, additional K-12 expenses such as curriculum materials, books, tutoring, and testing fees also qualify. Funds can also be used for apprenticeship program expenses and to repay up to $10,000 in student loans for the beneficiary or their siblings.

Contributions to a 529 plan are considered completed gifts for gift tax purposes and fall under the annual gift tax exclusion. Grandparents can contribute up to $19,000 per beneficiary in 2025 without gift tax implications. A unique feature is the ability to “front-load” contributions, allowing a lump sum of up to five times the annual exclusion. This means an individual can contribute up to $95,000 in a single year, or $190,000 for married couples, and elect to treat the gift as if spread over five years. This strategy requires filing IRS Form 709.

For financial aid, 529 plans generally have a favorable impact. They are typically treated as an asset of the account owner, rather than the student. To open a 529 plan, individuals can visit state-sponsored program websites or consult financial advisors. Required information generally includes details about the beneficiary and the account owner.

Trusts for Minors

Trusts offer a highly customizable and flexible approach to gifting money to grandchildren, though they involve greater complexity and cost. A trust involves a grantor, a trustee, and a beneficiary. Grandparents might choose a trust to maintain control over how and when assets are distributed, set specific conditions, protect assets from creditors, or manage funds over an extended period.

Two common types of trusts for minors are Section 2503(c) trusts and Crummey trusts. A Section 2503(c) trust generally requires assets and income to be distributed to the beneficiary by age 21. This type of trust allows contributions to qualify for the annual gift tax exclusion. Crummey trusts allow the beneficiary a temporary right to withdraw gifted assets, typically for a short period after contribution, which enables the gift to qualify for the annual gift tax exclusion.

Establishing and maintaining a trust involves legal and administrative complexities. The initial cost of setting up a trust can range from $1,000 to $5,000 or more, depending on the trust’s complexity and attorney fees. More complex or irrevocable trusts may incur higher setup costs. Beyond setup, there can be ongoing administrative expenses, such as trustee fees or accounting costs, especially if a professional trustee is appointed.

Trusts are subject to their own income tax rates, which are generally more compressed than individual rates. For 2025, trust income is taxed at 10% for income up to $3,150, 24% for income between $3,150 and $11,450, 35% for income between $11,450 and $15,650, and 37% for income exceeding $15,650. These rates mean income retained within a trust can be taxed at higher rates more quickly than if distributed to an individual. Contributions to a trust may also be subject to gift tax rules, depending on the trust’s structure.