Gifting money to your grandchildren

Gifting money to your grandchildren can give them something to remember you by and set them up for financial success. If you take the appropriate steps, it can also reduce the taxes your family might owe on your estate.

Here’s how to gift money to your grandchildren, including how much you can give and the many ways to make it happen.

Benefits of giving money to your grandchildren

Many people assume they should pass their assets from one generation to the next. But it can also be beneficial for your assets, especially money, to skip a generation (or go to both your children and your grandchildren). Your grandchildren may be less established, so an inheritance could make more of a difference in their lives than it would for their parents.

Benefits of giving to your grandchildren include:

• Securing their financial future: Today’s dollar buys less than it did a generation ago. Wages also haven’t quite kept up, so even if your grandchildren are gainfully employed, it may take them more time to achieve the financial stability of their parents. Giving them money could be the boost they need to secure their future, whether that’s buying a house or funding a retirement account.
• Ensuring they have control of the money: Designating funds specifically for your grandchildren can be a fulfilling way to leave an inheritance specifically for the younger generation rather than expecting your children to pass it down.
• Creating a tax advantage: Gifting money reduces the size of your estate, which can in turn reduce the taxes your heirs will owe. You don’t have to have a lucrative estate for the tax advantages to be worthwhile. Fewer estate taxes mean more of your estate gets distributed directly to your loved ones, regardless of the amount you leave behind.

How much money can you give to a grandchild tax-free?

If you gift money to your grandchildren, you can create a tax advantage for your estate. But if you give them too much, the gift may be subject to taxes that the recipient would have to pay.

In 2023, you could gift anyone up to $17,000 per year tax-free—this is known as the annual gift tax exclusion and is set each year by the IRS . You won’t have to pay a gift tax on funds at or below this amount, and it won’t add to their taxable income. This amount is per grandchild. That means if you have three grandchildren, you could give each one $17,000 (so $51,000 total) tax-free. And you can give this once a year, if you wish.

Ways to give money to your grandchildren

Even if you know you want to give to your grandchildren, there are many ways to pass on your money. Depending on your situation, you could give them cash or consider other options to make sure your money supports your grandkids as you intended.

You can give money to your grandchildren by:

• Giving cash: Cash can be used any way the recipient wants, but there are other giving options that let you designate your gift for a specific purpose. Remember that gift sizes over the annual gift exclusion amount will be subject to taxes. Consider other gift options if you’d like to give above that amount.
• Paying their expenses: In addition to gifting cash to your grandchildren, you can pay their medical or educational expenses. As long as you directly pay the provider, there’s no limit to the expenses you can pay.
• Creating a custodial account: If your grandchild is a minor, you can create a custodial account that their parents oversee. This is a great option if they’re too young to manage the funds themselves and you trust their custodial parent to oversee the account.
• Establishing a trust: Trusts work similarly to a custodial account, except you’ll appoint a trustee. The trustee can be their parent, but it doesn’t have to be. Trusts are typically for large amounts of money and can include conditions like an age requirement to access the funds.
• Using a 529 plan: In a 529 plan, you’re setting aside funds specifically for your grandchild’s higher education. These funds won’t be taxed, so they can also reduce your estate’s tax liability.
• Starting an IRA or retirement fund: You can also open an IRA or other retirement fund on behalf of your grandchildren. Though this could provide for their future, the account earnings will be subject to taxes like any other retirement plan.

Of course, you can always consult with a financial or tax professional for advice specific to your circumstances.

Giving the gift of life insurance

If you set up life insurance correctly, it can provide for your grandchildren in a way that cash or even a retirement fund can’t. Here’s what you can do to ensure your life insurance benefits your grandchildren:

• Designate your grandchild as your beneficiary: This ensures your death benefit passes directly to your grandchild. You can list them as a beneficiary on your existing policy or, if you don’t have one, open a new policy. This applies regardless of whether the policy is term or whole life insurance . Just keep in mind that term life insurance only lasts a set number of years and may expire before you pass away, ending the potential for a death benefit payout.
• Buy a whole life insurance policy for your grandchild: You can actually buy a whole life insurance policy for your grandchild and name them as the insured (with parental consent if they’re a minor). This would work similarly to buying a life insurance policy for your child. Whole life insurance never expires and includes cash value that grows over time. Your grandchild can choose when to cash out the policy, making it similar to a longer-term savings account, as long as you continue paying the premium.

When the grandchild can afford it, or when you pass away, they may even be able to become the policyowner, at which point they would start paying the premium. This would likely be more affordable than getting their own policy in adulthood, since the life insurance rate was locked in when they were younger. Plus, it would allow them to pass the benefit on to their own loved ones if they don’t cash out on it themselves.

Life insurance can also be a great complement to other gifts you leave for your grandchildren, whether you give them cash or open an account in their name. It can also give you peace of mind, since you’ll know they’ll be taken care of even if you don’t have a large estate to leave behind. Learn about the types of life insurance and get tips for how to buy it.