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Things to Consider Before Giving to Your Grandchildren

Many grandparents take joy in giving gifts and money to their grandchildren. Whether paying for groceries or establishing a college savings fund in their name, providing financial support for grandchildren can be a wonderful gesture, but it should be managed within the context of an overall financial plan. This is particularly true for those in or nearing retirement – a period in which traditional income is often reduced or eliminated, and expenses for healthcare and other costs have the potential to increase. If you’re contemplating passing down wealth to your grandchildren, consider these tips for doing it in a way that’s beneficial for both them and your finances.

1. Give only what you can afford. Your own financial security should be your first priority. Since there is no way to know with any certainty how long you’ll live, how the market will perform or how inflation may impact your purchasing power in retirement, make sure that you gift within your means. Doing so will help ensure your generosity today doesn’t create a financial hardship for you down the road.

2. Clarify whether you’re making a loan or giving a gift. If you’re giving a gift, familiarize yourself with federal tax rules, which are based on the calendar year. For example, in 2017 you can give up to $15,000 to each of your grandchildren before the federal gift tax is applied. Be sure the recipient knows it’s a gift to alleviate any uncertainty about whether they’re required to pay you back.

If you are loaning money to a grandchild, be specific about the terms of repayment. Spell out the terms in writing and have both parties sign and date. This will help safeguard your financial situation and ensure both of you are on the same page – now and in the future.

3. Discuss your intentions. If you would like to help your grandchildren pay for college or make a down payment on a home, be sure to communicate this with their parents. Be upfront about the amount you’d like to contribute, and keep the conversation open in the event that future situations impact the dollars you’re able to give.

For example, if the parents of your grandchild know how much you are expecting to contribute to their child’s education, they may be able to decrease the amount allocated to a 529 Plan and investment more toward other goals, such as their own retirement.

4. Set appropriate boundaries. Even if you want to help your grandchildren financially, depending on their age, it may not be appropriate to do so. For example, many young adults take pride in their financial independence. The experience of letting them live within their own means can be an excellent teaching opportunity. Keep in mind the smart — and sometimes tough — financial lessons you learned as you made your own way as a young adult, and the pride that came with successfully overcoming challenges.

5. Incorporate giving into your overall financial plan. Your financial priorities are likely to change, especially as you near or move through retirement. Evaluating your giving goals against your other priorities will give you a clear and realistic understanding of how much you can comfortably give, as well as the most tax-efficient and effective way to go about it.

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