Giving Money to Your Grandchildren

In Spanish | Let's hear it for grandparents! Financial planners tell me that, increasingly, you're stepping up to help your grandchildren, especially with higher education expenses.

"There's more of this going on than in the past, because more of the parents are hurting financially," says Westwood, N.J., planner Tom Orecchio. Also, "Grandparents have a soft spot for giving to grandkids," says Columbus, Ohio, planner Gary Vawter, "all the more so if the parents need less."

Before you start writing checks, however, be sure that you have enough saved for yourself — to get through a business downturn or cover the potential cost of long-term care. God forbid you should have to ask for the money back.

You risk spending too much by making fixed, future promises, such as "$5,000 a year for each grandchild for college." That might become an albatross around your neck in your older age. Instead, stay flexible, says planner Courtney Weber of Cincinnati. Your family should understand that one year's gift may be larger or smaller than the gift the year before, or may not come at all.

One approach is to vary your generosity by the size of your investment portfolio, Vawter says. Establish the floor amount you feel that you need for your own security and make gifts only in years that your nest egg is worth more than that. Alternatively, you might help with specific bills, such as braces or medical expenses not covered by insurance. If you pay the doctors directly, it won't affect the annual amount you can give that same grandchild, gift-tax-free ($14,000 in 2013; $28,000 for married couples filing jointly).

Tax-favored 529 plans for college — a common grandparent choice for young children — are flexible, too. Make an initial contribution to open the plan (as little as $5 to $15, but you'll probably want to start with more), then add money as you can afford it. The plan is invested in mutual funds. There's usually a state tax credit or deduction for your contributions. The funds can grow tax-free if used for higher education, as planned. If the parents live in another state, and start a 529 for the same child there, they might get a tax credit or deduction, too.

What's more, 529s hold a unique place on the shelf of estate-planning tricks for people with substantial wealth. Any money you put into these plans is out of your estate, so it escapes the estate tax. But if you find that you're low on cash, you can take the money back, subject only to a 10 percent penalty on the money your contribution earned.