Improving Your Grandchild’s Financial Literacy
/By Kelly Doyle
Welcome to the latest edition of our newsletter! This month, we focus on a topic close to the hearts of many of us: ways we can share with a younger generation. Spoiling grandkids has been a tradition embraced in our culture for a long time, whether it be overindulging with ice cream, extending movie time, or allowing them to stay up extra late. However, if you’re looking for a way to give your grandkids money in a sensible, tax-efficient way while imparting some financial education, consider the following clever gift ideas.
Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA)
Instead of just giving cash, consider opening an UTMA or UGMA account. Simply use your grandchild’s social security number to open one of these custodial accounts through platforms such as Charles Schwab or Fidelity. All you have to do is provide some basic information, such as the minor’s social security number. You control the account until he or she reaches the age of majority (which is different in every state). Within this account, you can buy stocks, bonds, and even real estate.
Use this as an option to teach your grandchildren how businesses and the stock market operate by buying a stock for a specific amount, say $50. This gives them an opportunity to own a portion of a share and track the original investment over time. The stock price will go up and down, so they can get an understanding of volatility. You can use it as an opportunity to provide some financial education about what a business is and how it grows, then expand their learning from there.
Another clever idea is to match that $50 used to purchase a portion of a share, then match and invest it in a low-fee, index-based mutual fund. Tracked over time, this should be an eye-opening opportunity to compare the results when you invest in a single company. It also demonstrates how volatile stocks can be compared to a diversified investment.
There are a few things to be aware of with UTMAs and UGMAs:
The first $1,300 (in 2024) of unearned income is tax-free. Above that, the income is taxed. See “kiddie tax” rules for more specific information.
The assets in the custodial account are the property of the minor, and this could affect college loan eligibility and amounts down the road.
The transfer into an UTMA or UGMA is an irrevocable gift, meaning that once the gift is made it can’t be transferred back to you.
The minor child must receive the funds upon reaching the age of majority, which varies in every state. In California, this means your grandchild can use the money as he or she sees fit as early as 18. Regardless of what your goals are for this money, your grandchild can use it for a car, college, or a Taylor Swift concert ticket – the choice is theirs. If you’re looking for more control over when your grandchild can access the funds, you may want to consider setting up a trust instead. An estate planning attorney can help with this.
529 Plans
The best way to contribute to your grandchild’s college education is by participating in a 529 plan. You can choose from a variety of different platforms, such as my529plan.org. Opening an account is quick and easy, requiring only your grandchild’s social security number.
You have three options for tax-free gifting via a 529 plan:
Gift up to $18,000 (in 2024) tax free per child per year
Double the amount when you and your spouse each contribute up to $18,000 for a total of $36,000 (in 2024) per child per year
Superfund the account by contributing five years’ worth of contributions in a single year ($90,000 for an individual, which would entail filing IRS Form 709 (Gift Tax Form))
While completely allowable, amounts contributed over these limits would require completing IRS Form 709, which would count against your lifetime gift tax exemption of $13.61 million (in 2024). These amounts may be well above what you expect to contribute, so be aware that you can contribute much smaller amounts, such as the example of $50 used above.
The money you contribute to a 529 Plan is a non-deductible contribution for the purpose of federal taxes. Withdrawn earnings are excluded from income if they are qualified education expenses for college or even secondary education up to $10,000 in 2024. Examples of qualified education expenses include college tuition, fees, books, computers and related equipment, supplies, special needs, and room and board for half-time to full-time students. The 529 Plan is counted as an asset of the parent if the owner is a parent or grandparent. This is good news for your grandchild with respect to any student loans needed down the road. Some states offer tax deductions or credits for contributions.
Write a Check
You can also gift money to a grandchild by writing him or her a check. As long as it’s under $18,000 (in 2024), it’s considered a gift that falls within the annual gift tax exclusion.
To further educate your grandchild about finances, accompany him or her to the bank to deposit the check into an account (or cash it). A tour of a brick-and-motor bank can help your grandchild better understanding the value of saving money.
Yet another strategy is to write two checks: one in your grandchild’s name and another that is left blank for a charitable donation. Then help him or her look up local organizations in your area and go over the list, allowing your grandchild to choose a charity to donate the money to. This can be a great way to expose him or her to philanthropy.
Give Cash
Instead of the traditional form of giving cash, you could present your grandchild with $1 bills to spend at the dollar store. As a fun way to celebrate a birthday, give him or her an amount equal to their age. For example, if your grandchild is turning 10, give him or her $10 in $1 bills. This creative approach exposes young kids to the value of a dollar and teaches them some basic financial-related math skills.
Other Financial Literacy Opportunities
To further your grandchild’s financial education, here are two additional ideas:
Explore the internet. The U.S. Mint offers free financial education on their website as well as tours at some of their facilities throughout the country. Spend time browsing the internet and reading articles with your grandchild or schedule a facility tour as a field trip.
Start a coin collection. Buy a booklet and work together to find coins. This can be a great way to expose kids to physical money like coins, which is becoming a rare opportunity in today’s digital world.
Conclusion
Choosing the right method to gift money to grandchildren involves considering factors such as tax implications, control over assets, and the intended use of funds. As financial planners, we recommend discussing these options with us to tailor a strategy that aligns with your goals and supports your grandchildren’s financial future. Finding creative opportunities to educate them and develop their financial literacy can be time well spent together that lasts far beyond the gift itself.
