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September 10, 2012

Consider these financial gifts for your grandchildren

National Grandparents Day Sept. 9

Brian Humphrey Rushville Republican

RUSHVILLE — National Grandparents Day is celebrated on Sept. 9. If you're a grandparent yourself, you already know the pleasures of having grandchildren in your life. So you may want to take this occasion to think of ways you can help those grandchildren get the most out of their lives.

Perhaps the most valuable thing you could give to your grandkids is the gift of education. Consider this: Over a lifetime, college graduates earn, on average, about $1 million more than those without a degree according to the Census Bureau. So, putting money toward your grandchildren's college education is probably a pretty good investment.

Furthermore, your grandchildren may well need the help, because college is expensive and costs continue to rise. Consequently, you may want to contribute to a 529 plan. You have several options for how the money can be invested and contribution limits are quite high. All withdrawals are free from federal income taxes, provided the money is used for qualified college expenses. (Keep in mind, though, that non-qualified withdrawals will be taxable and possibly subject to penalties.) Plus, if you invest in your own state's 529 plan, your contributions may be deductible on your state income taxes.

If you name one grandchild as a beneficiary of a 529 plan and that grandchild decides not to go to college, you can switch the account to another grandchild - in other words, you maintain control of the money for the life of the account.

Of course, despite its economic benefits, college is not for everyone. If you want to provide financial help to a grandchild who seems likely to choose a different route in life, what can you do?

One possibility is to set up a custodial account, often known as an UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act). You can fund a custodial account with many different types of investments, but the use of the money is entirely up to your grandchildren when they reach the age of termination in whatever state in which they live. But if your reason for funding a custodial account is simply to provide a gift, then you might not be concerned with how the money is used.

On the other hand, if you want to give your grandchildren a financial gift with greater control, you may want to speak to your attorney about your options. One possibility is to set up an irrevocable trust. You can fund this trust with either cash or securities and specify at the time the trust is created when the funds can be used. For example, you can provide that the trust pay your grandchild a certain amount of money at one age, with another installment coming several years later. Keep in mind, though, that trusts are complex instruments and may have tax considerations. In addition to consulting with an attorney, you'll want to discuss your plans with your tax advisor.

Whichever option is right for your family, use Grandparents Day as an opportunity to consider the ways in which you can give something to the grandchildren who give so much to you.



Brian Humphrey is a financial consultant and investment advisor.

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