How to Give Smartly
(9/25/12) It's only natural for grandparents to want to help their grandchildren financially. But the weak economy and job market are spurring a growing number of older people to give until it hurts (The Wall Street Journal
Sept. 14). Financial planners say that's a mistake.
Grandparents living off their savings should consider how gifts they make now, drawing down investment principal, will affect their future earnings. In the worst-case scenario, such gifts could wipe out their savings before they die.
The good news is that there are ways to keep giving now while avoiding trouble later in life. Here's the collective wisdom of grandparents and financial planners across the country:
- Pare your gifts to offset the pain. Giving to grandchildren isn't an all-or-nothing proposition. You might be able to stay on track just by scaling back a bit.
- Make loans instead. Some grandparents opt to become lenders. Loans to their grandchildren can serve as a less formal alternative to co-signing credit union or bank loans. But it's wise to provide specific repayment instructions.
- Create a teaching moment. Use stocks to impart investing and financial-planning lessons to grandkids, especially if you'd like to pass along the assets anyway.
- Delay grandkids' gratification. One of the best ways to make gifts to grandchildren is posthumously -- leaving them a Roth IRA (individual retirement account), from which inherited withdrawals are free of income tax.* Although heirs have to take distributions every year, they can spread them across their life expectancy, so younger inheritors could choose to leave much of the account intact, with any future earnings income-tax-free as well.
- Practice equality. Whichever approach you use, think about conflicts that could arise if one grandchild gets more than the others. In the worst-case scenario, family members could wind up in court over such disparities.
Back to Consumer News *Consult with a qualified professional for tax advice.