When it comes to most client meetings with my retiree crowd there are similar discussion points that arise time and time again.  These include a quick review of income needs with any changes that may have occurred, concerns about the stock market volatility with the new administration in our nation’s capital, or another Q&A session about our long-term care strategy.  However, once those adorable innocent grand babies enter the picture, we add a new discussion point to the agenda GIFTING!  It’s so very important to us from an emotional standpoint to help the next generations have a leg up on the previous. Before acting on these emotions, one must consider the financial aspects tied to an effective gifting strategy.  The purpose of this blog post is to highlight a few of these areas for you to consider before making a gift.

First, “Have a Plan”

Before setting expectations regarding gifts, it is very important for grandparents to ensure they can support this gifting without causing harm or stress to their own financial well-being. It is important for you to understand it is ok to say “no” and not feel guilty.  What I have seen frequently happen is a grandparent over-gifts to the first grandchild because of pure excitement and then comes to the harsh realization they can’t gift in the same fashion to future grandchildren.

Secondly, “Share Some of your History”

Through the years of assisting in administering estates, I have noticed a common theme amongst families: uncertainty as to how this money came about and why certain decisions regarding these monies were made.  It is important to share the story as to not only why you held onto that Exxon stock for so many years, but also why you bought it in the first place.  Making a gift and passing along with it any meaning as to “why this asset” and “why now” will ensure a more complete gift.  Gift recipients tend to form a sense of entitlement, and I have found in my experience that these good practices help minimize unappreciative younger generations.

Last but certainly not least, “Know Implications”

Knowledge is power, and being informed can help prevent negative consequences because of something as positive as a gift going wrong.  A very common gift is from a grandparent to a grandchild for college through a 529 Plan.  Considering the grandparent understands the rules behind the annual gift tax exclusion amounts of $14,000/year per grantor per recipient, a gift to a 529 plan can be very helpful for college planning.  The question that often comes up is how will this affect the college applicant’s ability to receive financial aid when completing the FAFSA.  Should the 529 plans be in the student’s name, parent’s name, or the grandparent’s name?  Each scenario has its pros and cons; the true concern should be which has a more negative impact on FAFSA filing.

529 Plan Owner Treatment of Asset Treatment of Qualified Distributions Treatment of Non-Qualified Distributions
Dependent Student Parent Asset Ignored Taxable Income to Beneficiary (AGI)
Parent of Dependent Student Parent Asset Ignored Taxable Income to Beneficiary (AGI)
Independent Student Student Asset Ignored Taxable Income to Beneficiary (AGI)
Grandparent Ignored Untaxed Income to Beneficiary Taxable Income to Beneficiary (AGI)

When referencing the above chart, here is what should be considered.  The treatment of an asset is extremely impactful when applying current calendar year financial aid.  However, when applying for subsequent years financial aid the treatment of qualified distributions from the previous play a very big role.  Student assets will reduce aid eligibility by 20% of the asset value (minus a small asset protection allowance) and parent assets will reduce aid eligibility by as much as 5.64% of the asset value. However, student income, including untaxed income, will reduce aid eligibility by 50% of the distribution amount (minus a small income protection allowance).

As you can see, there is plenty to consider when making gifts so be sure to consult your financial, tax, and legal professionals so you can be proactive in making the best decision possible for all involved.