Grandparents Pitch in With Financial Help

by Dianne Molvig

Family life has changed in many respects over the ages. But one thing remains constant: Grandparents love to dote on their grandchildren, every chance they get. A popular bumper sticker sums it up: "If I'd known grandchildren were so much fun, I would have had them first."

Grandparents derive great pleasure from doing whatever they can to enrich their grandkids' lives, now and in the future. Sometimes that includes providing some sort of financial support.

A financial boost

Grandparents pitch in financially in diverse ways, depending on their own financial means. Maybe they help out working parents by providing free child care a couple of days a week. Or they pay for ballet lessons or a summer soccer camp that otherwise would squeeze the family budget.

Some grandparents look further into the future by saving for their grandchildren's college education. "The most common way to do that now is to set up a 529 plan," says David Hayes, a certified financial planner and credit union member in Nashville, Tenn.

A 529 is a state-operated investment plan that offers a federal tax-free way to save for college. Several states also offer tax breaks. And contributions are excluded from your estate for estate tax purposes.

You can contribute up to $11,000 annually per donor--or $22,000 annually per couple--for each child. Bigger annual lump sums are possible, but state excise taxes may kick in. Most 529 plans allow total investments of $200,000 per beneficiary, sometimes more.

"An advantage of a 529 plan is that the money remains in the control of the donor," Hayes explains, "instead of automatically coming under control of the beneficiary" at a certain age, as is the case with some other savings instruments.

Thus, you don't run the risk of your grandchild skipping out of college and using that money for a Miata convertible. "Or if the child doesn't need the money in the 529 plan," Hayes adds, "then it can go to someone else who qualifies, usually a family member" to pay college expenses. Or you can withdraw the money for a modest penalty.

Another tax-favored way to save for a grandchild's education is through a Coverdell education savings account, in which you can contribute up to $2,000 a year per child until he or she reaches age 18. To qualify for a full contribution, you must have a modified adjusted gross income of less than $190,000, if you're a married taxpayer filing jointly, or less than $95,000 for single taxpayers.

For more on Coverdell accounts and 529 plans, see "Tax-Favored Ways to Save for College."

Yet another way grandparents can help with preschool, private school, or college tuition is to send a check directly to the school. You can write as big a check as you wish--this won't count toward the $11,000 annual gift exemption.

Taking care of family dynamics

Money often is a touchy subject between generations. Remember the days when your kids habitually bugged you for extra spending money and gladly would pocket whatever you were willing to dole out?

With adult kids, it can be tougher to predict how they'll respond to parental financial help, even if it's meant for the grandchildren's benefit. Your offspring may be so presumptuous as to expect you'll give them money. Count them among those who never grew up. Others may graciously welcome the extra funds to ease the financial burden of raising their family. And still others with a strong independent streak may rebuff your help.

Other factors also weigh in here, such as how much money you're giving and what you're giving it for. Your adult kids may be open to help with college tuition, but not to an offer to buy 16-year-old Sam a brand-new Harley.

In all such matters, "I suggest communication is the solution," Hayes says. "Have a family meeting and say, 'We have more money than we need for our retirement, and we'd like to do something to help you and the grandchildren.'"

Talking to your children first is paramount, agrees Mark LaSpisa, a certified financial planner in South Barrington, Ill. "Find out what the parents' goals are for your grandchildren," he suggests, "and what if anything they're doing [to attain those goals]. Then coordinate what you want to do with what the parents are intending to do."

Giving more than money

Sarah and her husband, credit union members in Georgia, wanted to give their granddaughter something special for eighth-grade graduation. They decided to open a savings account in their granddaughter's name to "encourage her to save for the future ... She has learned to become a saver at an early age," says Sarah, a respondent to the Resource Center's "What's Your Story" feature. (We developed this article with input from readers contributing to What's Your Story.)

Raquel, an Alabama credit union member, says her in-laws set up trust funds to help pay for their four grandchildren's college tuition. "More important are the money-managing life lessons taught by my father-in-law," Raquel adds. "He has guided us in making sound, conservative investments."

As these examples indicate, grandparents often are more than mere money-givers when it comes to financial help. They're also role models for establishing wise money habits.

That's one good reason to give away some of your money, as you're able, while you're still alive, rather than waiting to leave your assets after your death. "When the grandparents die," LaSpisa notes, "the heirs get their money in one lump sum. One lump sum means one chance to do the right thing. If they do the wrong thing, the money is wasted."

On the other hand, by giving money to children and grandchildren while you're still alive, "You can sit back and see what they do," LaSpisa says. "Maybe one pays down his credit cards. Another goes out and buys all new clothes. And another invests in mutual funds. That gives you some feedback while you still have a chance to be a mentor to your kids and grandkids" about smart ways to handle money.

Another mentoring tactic is to set up a savings match program with a grandchild, LaSpisa suggests. For every dollar your grandchild puts into a savings account, you match it. Likewise, if the grandchild withdraws a dollar, so do you.

In these and other ways, you can impart a few financial lessons, as well as funds. What's more, you may launch a family tradition. Following your example, someday your grandchildren may be helping their grandchildren get off to a good start financially.

March 6, 2006