Giving to Grandkids? Consider Gift Tax, 529 Plans, and More

Takeaways

• Grandparents should clarify whether financial assistance for their grandkids is a gift or a loan.
• Consider 529 plans for education funding to ensure fairness and tax benefits.
• Grandparents should also ensure their own financial security, especially regarding potential long-term care costs.

Grandparents often are particularly generous to grandchildren. They see their family’s legacy continuing to the next generation. In many cases, grandparents feel they have ample resources while their children or grandchildren may be struggling financially.

Assistance with summer camp fees, college tuition, wedding costs, or a down payment on a first home can allow grandchildren to take advantage of opportunities that might otherwise be out of reach. Some grandparents also feel it isn’t right that children and grandchildren should have to wait for an inheritance when they have more than they need.

Helping out family members is to be encouraged but can raise legal issues. These issues may involve taxes, eligibility for public benefits, and questions of fairness among family members. Here are six issues grandparents should consider before making gifts to loved ones:

Is It a Gift or a Loan?

Does the grandparent expect anything in return? Do they want the funds repaid, or is the money an advance on the grandchild’s eventual inheritance? Either way, they should make this clear, preferably in writing. This could be a letter that accompanies the check or, in the case of a loan, a formal promissory note.

Is Everyone Being Treated Equally?

Not every grandchild has the same financial needs. At the same time, grandparents may not feel equally close to all their grandchildren. While it’s their money and they can do what they want with it, they should consider whether unequal generosity might create resentment within the family.

Many elder law clients say that what they do with their money during their lives is their business. They may help some children and grandchildren more than others based on need, expecting privacy. Later, they may choose to treat all their children equally in their estate plan.

Beware Taxable Gifts

Any gift to an individual over $19,000 (in 2025) per year must be reported to the Internal Revenue Service (IRS) on a gift tax return using Form 709. Two grandparents together can give up to $38,000 per recipient per year (as of 2025) without reporting. Payments made directly to medical and educational institutions for health care or tuition do not have limits or reporting requirements.

529 Plans

Many grandparents want to help pay higher education tuition for their grandchildren, especially given today’s high undergraduate and graduate costs. But not all grandchildren are the same age. This can make it difficult to ensure equal assistance. Some grandchildren may still be in diapers while others are earning doctorates.

One solution is to fund 529 accounts for each grandchild. These accounts grow tax deferred. Their income and growth are never taxed as long as the funds are used for higher education expenses.

Don’t Be Too Generous

Grandparents need to ensure they keep enough money for their own needs. Small gifts probably won’t make a difference. But too many large gifts can quickly deplete a lifetime of savings. It won’t help the family if a grandparent is barely scraping by because they overextended to support children or grandchildren.

Consider the Need for Long-Term Care

Grandparents should consider the possibility of needing care. Whether they stay at home in later years or move into assisted living or a nursing home, long-term care is costly. In 2024, the annual median cost of in-home care with a home health aide in the United States was nearly $80,000.

Seniors who can’t pay for care from their own funds should know that gifts may make them ineligible for Medicaid benefits for the next five years.

What Else to Keep in Mind

Every family has unique dynamics, so other issues may arise. You might not trust your grandchildren to spend a gift wisely. Your gifts may also interfere with the parents’ plans.

In some cases, grandparents may consider “incentive” trusts. These distribute funds when grandchildren reach milestones, such as graduating college or holding a job. Communication with the middle generation can help ensure gifts achieve the best results for everyone.

Plan Wisely for Your Grandchildren’s Future.

Speak with an elder law attorney today to ensure your gifts support your family without compromising your security.