Giving Gifts to Grandchildren Without Wrecking Your Own Financial Future or Creating a Sense of Entitlement

Q. I have six grandchildren — three from each of our two daughters. They live close by so I see them often and adore every one of them. I am not getting any younger and have some money I’d like to gift to them now, while I am still alive, so I can see them enjoy it. What is the best way to figure out how much I can afford to give and to give gifts without creating a sense of entitlement? Please also discuss any tax and Medicaid planning implications of giving money to them now. Thanks for your help!

A. It is only natural for grandparents to want to help their grandchildren financially.

But before families start writing checks, the most important thing to consider is whether or not they should make gifts in the first place. As a retiree, the first thing you should do is make sure there is money in your bank account to cover your own living expenses. Kiplinger features a retirement calculator that can help you estimate what your retirement savings will be worth in the future. It will also help you determine how much more you need to save each month to meet your retirement goal. Once you figure out what you can give, then there are some other factors to consider.

Helping Your Grandchildren Financially

So, how do you help your grandchildren without wrecking your own financial future or creating a sense of entitlement? Here is the collective wisdom of grandparents and financial planners across the country. Remember, gifting can still affect Medicaid eligibility, which I will describe later in this article.

  • Don’t give more than you comfortably can: Don’t give to the extent that you might possibly jeopardize your own financial future (see above). You may need to scale back your intended gifts a bit to make gift giving possible.
  • Help save/pay for college: Grandparents looking to contribute funds to cover their grandchild’s college costs often turn to 529 plans, a type of account that provides tax benefits for education savings. The principal and earnings from a 529 plan are not taxed, as long as the money is used to pay for qualified educational expenses.
  • Gift taxes explained. Any person can give any other individual up to $15,000 in 2021 without having to file a gift tax return – that’s $15,000 per person this year, meaning grandma and granddad could give $30,000 this year to each of their grandchildren without having to file a gift tax return. Many people mistake this annual gift tax exemption with a gift tax “limit.” There is no gift tax limit. Many people also think that if they give more than $15,000 per year to an individual, then they will have to pay some sort of gift tax or some sort of penalty; this is a complete myth. If you give away more than $15,000 a year to one individual, that simply means you have to file an informational gift tax return; 99.8% of people will never have to pay any gift tax. Many people also believe that the recipient of a gift has to pay tax on the gift they receive. These are all complete misunderstandings of the law. The only people that will ever pay a gift tax are the givers of a gift (never the recipients), and only if the givers give away more than their lifetime gift tax exemption, which is currently (2021) $11.7 million per individual and double that for a married couple (this lifetime gift tax exemption is scheduled to go down in the year 2026 to approximately $6 million per individual, and double that for a married couple).
    • There is an exception to this gift tax specifically for 529 plan contributions, which allows individuals to front-load a plan for up to five years at one time without having to pay the tax. 529s are unique, so you can do five years of that. If you have the money, you can (contribute) $150,000 at the child’s birth, which will grow each year before they go to college.
    • If your grandchild is of college age and you are financially able, it may be wise from a tax perspective to pay tuition directly to a grandchild’s school out-of-pocket rather than creating a 529 plan. For example, a grandparent could pay a $50,000 tuition bill for a grandchild directly to the university and it doesn’t count toward their gift exemption.
  • Make loans instead: Some grandparents opt to become lenders. Loans to their grandchildren can serve as a less formal alternative to co-signing bank notes. If you decide to do so, it is wise to provide specific repayment instructions to your grandchild. If the loan is handled properly, it might be a good way to help the grandchild while at the same time allowing them to make their own way in the world.
  • Create a teaching moment: You can use stocks to impart investing and financial-planning lessons to grandkids, especially if you would like to pass along the assets anyway. Gifting stock or investments rather than cash can be a way of teaching grandchildren the value of money.
  • Delay grandkids’ gratification: One of the best ways to make gifts to grandchildren is posthumously—after death. Gifting money at certain dates or upon certain events / milestones, rather than on a regular basis, can also help grandchildren rely on their own resources first.
  • Practice equality: Whichever approach you use, think about conflicts that could arise if one grandchild gets more than the others. In the worst-case scenario, family members could wind up in court over such disparities. In fact, one of the most common reasons for litigation between family members is perceived favoritism. One strategy for avoiding future battles is described above and involves making a loan. You can specify in your estate-planning documents that any amount not repaid would be subtracted from that child’s or grandchild’s share. Similar to a loan, you can also make “advancements” on an inheritance, which are deducted from the eventual total inheritance after your death but will never require repayment.
  • Set up a trust: Another way to make it clear that all the grandchildren are getting the same inheritance is to set up a trust that equalizes everything. It’s also a good chance to sit with your family and say, “This is the trust we’ve set up in estate planning, and we think it’s the fair way to go. If anyone has a problem with it, let’s talk about it now.”

Also, be aware that as you choose to gift assets, it is wise to take into account the feelings of family members and how said gifts will affect them in the long run.

How Gifts Can Affect Medicaid Eligibility

It feels good to give gifts to loved ones, such as children or grandchildren, or to charity, but if you think you might someday want or need to apply for Medicaid long-term care benefits, you need to be very careful because giving away money or property can interfere with your eligibility.

Under federal Medicaid law, if you gift certain assets within five years before applying for Medicaid, you will be ineligible for a period of time (called a penalty period), depending on how much money you gifted during the five-year period immediately prior to filing for Medicaid, called the Medicaid five-year look back period. Even small transfers can affect eligibility. While federal law allows individuals to gift up to $15,000 a year (in 2021) without having to file a gift tax return (as explained above), Medicaid law still treats all of those gifts as penalized transfers. Please see our page Medicaid: The Perils of Gifting FAQs for more details. For more information on Medicaid’s transfer rules, you can also click here to see a helpful resource from Elder Law Answers. For more on the gift tax rules, click here.

Consider Financial Planning and Medicaid Asset Protection Planning with the Farr Law Firm

Whether you’re close to retirement, already retired, employed, or recently unemployed, it is important to protect your quality of life and your golden years with estate planning, long-term care planning, and financial planning, including setting up trusts for children and grandchildren and discussing Medicaid eligibility.

Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my affiliation with Protection Point Advisors.

As always, if you or a loved one are nearing the need for personal care or already receiving personal care, or if you have not done Long-Term Care Planning, Estate Planning, Financial Planning, or Incapacity Planning (or had your planning documents reviewed in the past several years), please call us to make an appointment for an initial no-cost consultation:

Fairfax Elder Law Attorney: 703-691-1888
Fredericksburg Elder Law Attorney: 540-479-1435
Rockville Elder Law Attorney: 301-519-8041
DC Elder Law Attorney: 202-587-2797
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