Is Grandma Too Generous for Your Own Good?
More and more grandparents are helping to pay for big expenses, but there's a right and a wrong way to do it
(MONEY Magazine) – When you have kids, your parents want to dote. And in many cases, "dote" means "shop." They drop a few hundred on a layette, a tricycle or the occasional PlayStation Portable. But compared with the increasingly generous gifts grandparents are doling out these days, a trike looks like, well, child's play. Think tuition and starter retirement accounts.
And with the money in their collective coffers, they're in a position to help. People old enough to be grandparents (50-plus) control more of the country's wealth than ever before: 70%, according to research group Age Wave. Arthur Kornhaber, who is the author of The Grandparent Solution and who has studied grandparental behavior (financial and otherwise) since the 1970s, says the result is that more grandparents are stepping in to foot the bill for their grandkids' upbringing.
For parents in the middle (that would be you), this may sound like a wonderful bind to be in. But your folks' generosity is not without possible problems for you and yours. Unless your parents are savvy, tax issues and financial aid ramifications can complicate any sizable gift. If your folks have money they'd like to pass down, no matter what they want to pay for, you should work together. There are potential pitfalls in even the most innocent scenarios.
• Your parents want to help pay for your son's college education. If your child is still a baby, your parents should simply set up a 529 savings plan in their name and contribute to it over time. The tax code allows any person (in this case, each of your parents) to give $11,000 to another person (your son) every year without paying the gift tax. This sort of annual gifting is valuable if your parents are trying to move money out of their estate. They can go faster--there's a rule that allows them to kick in five years of contributions to a 529 in a single year without triggering gift taxes--but that's not always a wise move, says Gary Schatsky, a New York financial adviser. Although your folks would be moving a bundle of money out of their estate at once, if the state's 529 plan has a tax deduction attached, it's likely capped at less than $55,000. In that case they would be wiser to stick to a yearly gift.
If your son is about to attend college and isn't likely to receive financial aid, your parents can write a check to you, your son or the school. But if he is a candidate, no gift money should be put in his name because it'll hurt his chances of getting any kind of assistance, says Kalman Chany, author of Paying for College Without Going Broke. One way around this would be for you to work with your son to apply for financial aid and, once you get whatever you're going to get, have your parents write a check for the difference directly to the school.
• Your daughter needs braces and your parents offer to pay. Excellent. They should pay the dentist directly. Since you can't apply for financial aid from an orthodontist (alas!) and since this isn't seen as a taxable gift, your folks can give an unlimited amount directly to hospitals and doctors if they wish to cover medical costs for any family member. Not only does this gesture help you with a big expense, but it's another opportune way for them to move money out of their estate with no tax penalty.
• Your parents have money but haven't offered to help. Ahhh, the trickiest question. They may simply not be aware of the benefits of unloading the money they were going to leave in their will. But how exactly do you bring it up? You don't want to appear greedy or presumptuous. And if they do offer to help, you don't want to make things awkward by lecturing them about tax codes and financial aid eligibility. "This is something I approach delicately with my clients," says Schatsky.
Present the need openly and honestly. Treat the conversation as a way to introduce information that they might not have known about. Say, "You know how expensive college is, and we were wondering if you're in a position to help. There are some advantages to your getting rid of money now vs. later--and we sure could use it." Offer an out by adding, "But we don't know your finances. If you can't do it, no explanation needed."
Again, make sure they're not just saving their money to bequeath later. Giving money while they're still living "allows the money to grow in the child's hands rather than the grandparents' estate, and it can reduce the size of the check the heirs will have to write to Uncle Sam," says Karin Barkhorn, an estate planning attorney at Bryan Cave in New York City. You might also mention another strategy Schatsky endorses: giving appreciated stock rather than cash. (It keeps the estate liquid, and when the child sells the stock, she'll likely be taxed at a lower capital gains rate than the grandparents' 15%.)
Whatever the particulars of your situation, the worst thing you can do is create the impression that you expect your parents' money, says Amy Goyer, who runs AARP's Grandparent Information Center. She has conducted numerous focus groups over six years on this topic and says grandparents are generally happy to help. But "they like to feel as if you're asking," she cautions. "They don't like to feel as if you expect it."