Giving to the Grandchildren

This content was taken from Your Life…Well Spent by Russ Crosson, Chief Mission Officer and Sr. Partner of Blue Trust

Over my 40-plus years in the financial services industry, I’ve noticed that some grandparents choose to leave large inheritances to their grandchildren rather than their own children, sometimes because they feel their children are not fully prepared to manage those funds. Interestingly, the grandchildren are often very young and have yet to develop a true understanding of spiritual and social capital, let alone financial stewardship.

I recommend, for the most part, that grandparents not give cash gifts or assets to their grandchildren, either outright or in trust. Instead, this money should go to their adult children, the grandchildren’s parents. Although this recommendation is inconsistent with sophisticated tax-planning techniques, such as income shifting and generation skipping, a trust can put grandchildren at a disadvantage. Since their parents have no control over the trust’s ultimate distribution to them, the grandchildren could develop a slothful attitude while they wait for the trust to fund their lifestyles.

Outright gifts or gifts in custodial accounts can also be harmful. These monies are immediately available to the child or, in the case of custodial accounts, will be available at the age of majority (18 or 21, depending on the state). In most cases, a child is better off having too little money than too much because it fosters the development of a strong work ethic, which is a valuable trait. Also, if the parents are teaching fiscal responsibility, a significant financial gift from grandparents could unintentionally undermine those efforts and counteract the values being taught.

Cash gifts to a grandchild should only be made after consulting the parents: first, to discuss the impact this money could have on the child and second, to agree on the expected use of this money, which can then be discussed with the child. This practice does not mean grandparents cannot give their grandkids small cash gifts as they would toys and clothes on birthdays and Christmas. However, grandparents should talk with the parents to determine what constitutes a small gift. For some, the allowable limit may be $20; for others it may be $100.The amount may increase with the age of the grandchild. Timing of the gifts should also be discussed. For example, giving a grandchild $100 on a birthday or to celebrate an accomplishment might not pose a problem, but giving the grandchild $100 every time the grandparents come to visit could be too much.

Is there ever a good time to leave significant cash or assets to grandchildren? Yes, if the money is given for a predetermined purpose and if the parents agree to it. For example, the grandparents could fund the grandchild’s college education. College education and private school tuition are two areas that may be beyond the traditional guidelines of parental support―which typically include food, shelter, clothing, public education, and medical care. I have found that parents usually appreciate help with educational costs and do not feel that the grandparents have infringed upon their responsibility to provide for their own children.

Here are a few suggested guidelines for large gifts:

• First, grandparents should not constantly remind the parents, grandchildren, or others of what they have given the grandkids. In some cases, grandparents use gifts as leverage to get the parents or grandchildren to behave a certain way, which makes the recipients feel beholden to the grandparents.
• Second, grandparents’ motivation to do something impactful for the grandchildren should never be to punish their own children, the parents. Skipping a generation can create problems between each generation.
• Third, when funding a college education, the amount given should align with anticipated earnings and education costs so that the majority of the funds will be used by the time the grandchild finishes college. Receiving a significant amount of money after college might unintentionally reduce motivation to build strong financial habits and a solid work ethic.
• Finally, trusts or custodial accounts for grandchildren should ideally be funded after confirming that the parents are on solid financial footing. It may be discouraging for parents to see resources earmarked for future generations while their own goals remain out of reach.

While you can receive some tax benefits from giving monetary gifts to grandchildren, these benefits are secondary. The most important consideration for grandparents in making any gift is the potential impact on the grandchildren and on their relationship with their own children. Instead of focusing on financial gifts, here are some ideas that support the intentional development of a godly posterity for all generations.

• Take the parents and grandchildren on a vacation. Many young couples do not have discretionary funds to take vacations. If the grandparents offer to pay for the trip and include everybody, they invest in a family memory. Not only will a trip together create memories and close connections, but the grandparents can also help reinforce the values and qualities the parents are teaching their kids. The vacation could be to the lake for a week, a ski area in the mountains, or a family camp. It could also be as simple as paying for the parents and grandchildren to come for a visit if they live in another state.
• Offer to fund private elementary and secondary school. The first 10 years of a child’s life are the most critical. This time frame is also when money may be tightest for parents. Grandparents can make a strategic investment for the grandchild to attend a private school that could help develop godly spiritual and social capital in them.
• Offer to fund housecleaning help. With parents of young children, funding something as simple as a regular housecleaning service could have a significant impact on the emotional and physical strength of the parents. This extra time and energy can then be channeled into the grandchildren at this formative time in their lives.
• Invest in the children and grandchildren by giving them time. Although it costs the least financially, giving your time is perhaps the most important thing grandparents can do to have a lasting impact on their family. Grandparents could offer to keep the grandchildren for an afternoon or a weekend so the parents can get away for some alone time, a planning session, a marriage seminar, or a retreat. All of these are investments in posterity.
  Today, it is common for the extended family to live far away from each other, and this investment of time may require using some financial and time resources. Perhaps to rent an apartment close to the children and grandchildren, to purchase airplane tickets to visit more frequently, or to drive many hours to spend short amounts of time with them. However, the gift of a grandparent’s time can make a huge difference in the life of a child.
• Make cash gifts if your extended family lives far away. It is more costly today to buy time than it was when extended families lived closer geographically. If grandparents can’t make the trip to give their time, then some unexpected cash gifts to the parents could be very welcome and helpful. It is important to remember that it’s more costly to raise children now than in previous generations, and parents are required to balance the economic struggles and cultural landmines of today with more competing demands on their time.

If you’re a grandparent, you likely can think of countless other ways to invest your time and money to enhance your posterity, or the character of the descendants you leave behind. But remember that ultimately, it’s the spiritual and relational legacy that matters most. Without careful guidance, even well-intended monetary gifts can unintentionally create reliance rather than resilience.

If you’ve already established trusts for your grandchildren, look for opportunities to also invest in your grandchildren’s values and character. In addition, if you have skipped your children in your estate planning (and left funds only to the grandchildren), then your children may want to reassess how much they leave to their own children.

Finally, maximize the time you have left to counsel your children and grandchildren on what it means to be truly successful. A gray head is a wise head, as Proverbs says, and no greater gift can be given to the next generations than teaching them how to earn and use money wisely.