It is a different world when our grandchildren are around. We invest time to spend and we relive so many wonderful memories. Investing in our grandchildren is also an investment in the future of our communities, and many people consider it a financial investment as well. And doing it while you are still living can serve to reduce your potentially taxable estate.
Currently, we have many choices, other than just leaving a lump sum inheritance after we pass away. Some grandparents still buy savings bonds or coin sets, hoping these will gain value and be used for making sound decisions, such as paying for college tuition or purchasing property as an adult. But are these really the best strategies, and will your grandchildren use your investment wisely? Below are two investment types that might be better options and ensure how your fiscal gift will be used.
Creating a trust is a popular way to invest in a grandchild’s future. Like everything, there are pros and cons. A trust fund can mean a more secure fiscal future, but only if you are going to move a larger amount of money into the fund. Trust funds can be costly to set up, so it is important to weigh the benefits.
There are three popular types of trusts with distinct benefits for grandchildren, whether a minor or an adult: The Generation Skipping Trust, a Credit Shelter Trust and an Irrevocable Life Insurance Trust. However, a simple revocable or irrevocable trust may be suitable.
Funding the trust may be made in a lump sum, or may be done over a period of time.
For the grandparent, a trust can mean the power to dictate how the legacy set aside is distributed. And depending on the setup, trusts can sometimes benefit a grandparent as a way to reduce estate taxes.
A 529 plan is a college tuition plan that can be either a savings plan or a prepaid tuition plan. As a savings account, the plan is set up by an account holder that can designate a beneficiary or student that will receive the funds for educational expenses. One of the great things about this plan is the funds can be used in all fifty states.
According to the Securities and Exchange Commission, the account holder can choose from several plans and investment options, including “age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age.”
The annual gift tax exemption should be considered to avoid paying gift tax on contributions (currently $14,000 for each gift given). Again, these contributions can be a way to reduce potential estate taxes. However, contributing to a college savings plan is typically easy, as periodic contributions can be made at any level you feel comfortable with.
Investing in our grandchildren also encourages them to be more fiscally responsible. When they can see how we prioritize important investments, such as higher education, we are providing an example that they can learn from.
There are more ways you can invest in the fiscal future of grandchildren. If you are interested in learning about them, your trusted financial advisor can help you.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.