How to Help Your Grandchildren Financially

Being fair does not necessarily mean giving each grandchild an equal dollar amount.

Many grandparents want to help their grandchildren — and even future grandchildren—financially. This can be challenging because so many issues of fairness can arise. If you have multiple grandchildren of varying ages and have been giving each of these grandchildren gifts of varying sizes since birth, the amounts may not be equal.

The process of balancing gifts is known as equalization. Only you can make the decision to equalize gifts to your grandchildren, but if you choose to do it, it’s important to plan. Remember, fairness does not always mean equality.

You should consider the wealth some grandchildren may inherit from their own parents and the chances your grandchildren have to be financially successful.

Let’s say you have three children. Two are just making ends meet. One is a successful executive married to a well-paid lawyer. They can easily pay for college, weddings and so on.

Here, you could write your will to specify transfers to all of your children, but only to the grandchildren whose parents are just scraping by. Your financially successful child can disclaim her bequest, and if she does, it will legally pass to her children.

Some may feel this is more satisfactory than giving each grandchild an equal dollar amount. It’s a personal decision you should consider carefully.

Some grandparents who didn’t originally care about equalizing gifts may feel differently when they get older. If one grandchild has received $10,000 over 10 years while another has gotten $1,000, it’s understandable you may want to even things out.

One option is to stop giving to the grandchildren who have received more until the grandchildren who have received less catch-up. For grandparents who are relatively young and in good health, this approach can work.

If you want to equalize gifts, begin as early as possible. A certified financial planner can help achieve your goals.

529 plan—a great way to support grandkids

One of the best ways to give is through a 529 college savings plan. Grandparents can contribute to a plan already set up by the parents, or they can set up a new account for a grandchild.

Withdrawals are tax-free if they’re used to pay for qualified education expenses such as tuition, room and board, and books. Many states provide an income-tax deduction for contributions made to 529 plans.

Contributing when the grandchild is young allows more time for the funds to grow tax-free. Because of this, 529s offer a unique feature that lets you make a lump-sum contribution of up to $70,000 and elect to spread the gift evenly over five subsequent years for tax purposes. Then, you won’t have to file a gift-tax return.

Future grandchildren

Even if you already have grandchildren, more grandchildren may be on the way. Part of the challenge of financial planning for grandchildren is planning for those who haven’t been born yet. Though you can always alter your financial plans to provide for new grandchildren while you’re alive, you may want to consider how to handle any grandchildren born after your death.

You can give your family some leeway by including a tool known as a special power of appointment in your will. This tool grants your spouse, child or another individual the power to change the terms under which assets pass to your grandchildren via trust. Special powers provide flexibility to help a grandchild with special needs or who runs into financial problems.

Legally, after-born children are children born after the creation of a will, trust or other document, while posthumous children are those born after the death of a parent. With the advent of reproductive assistance, the latter situation is becoming common.

In a 2012 case, the U.S. Supreme Court considered the case of a woman who conceived and gave birth to twins after her husband’s death from cancer using sperm donated and frozen by the husband. The Social Security Administration denied survivor benefits to the posthumous children.

In Florida, where the couple resided, inheritance in such cases is only permitted if the beneficiaries are named in a will. In this case, the husband’s will did not specifically acknowledge children conceived after his death, so they did not qualify, the Supreme Court ruled.

Planning for future children is complex enough, let alone future grandchildren. Since grandchildren do not have the direct beneficiary rights that children do in some states, there is an extra layer of distance. And while grandchildren born after their grandparent’s death are nothing new, there are few legal mechanisms in place that automatically provide for their inheritance.

The provisions in your will that apply to all your grandchildren are unlikely to extend to any grandchildren who may be born after your death. Depending on the timeline, your estate may have been entirely distributed before their birth, unless the executor had a reason to set part of it aside.

Nevertheless, you can make provisions for any grandchildren who might be born after your death. Being as specific as possible about any current and future beneficiaries will clarify your intentions and help make sure your wishes are carried out.

Inheritance laws vary widely from state to state, and in some places, it may not be practical to provide for after-born grandchildren through your will. In those states, establishing a trust can be very effective. Trusts can be established in a variety of ways to address the needs of current and future generations, including grandchildren who are not yet born.

Rebecca Pavese, CPA, is a financial planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office.

Palisades Hudson Financial Group is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with more than $1.3 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.

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