Something Personal Episode 7: Grandchildren, Current And Future
Grandkids are a joyful part of life. They also can, and should, be part of your overall financial plan. Senior client service manager and chief investment officer Anthony Criscuolo walks listeners through the practical side of offering financial support to your grandchildren in the most effective ways possible. He and host Amy Laburda cover how to make gifts in a tax-efficient way; how to financially support a grandchild’s educational pursuits; how trusts can help with the uncertainty of grandkids’ future abilities and temperaments; and more. They also touch on leaving a legacy for any grandchildren who may arrive after your lifetime.
About the Guest
Anthony Criscuolo, CFP®, EA, is based in the firm’s Atlanta office, where he serves clients around the country. As chief investment officer and chairman of the firm’s investment committee, Anthony leads a team of portfolio managers and associates focused on finding the most efficient and cost-effective ways to implement client portfolio strategies. He is among the authors of the firm's book Looking Ahead: Life, Family, Wealth and Business After 55, and his chapter on grandchildren serves as the basis for this episode. For Anthony's full biography, click here.
Episode Transcript (click arrow to expand)
Amy Laburda 00:05
Welcome to “Something Personal,” the podcast where a team of financial planners help you plan for the grandchildren you may have now, and even the ones you may have later. I'm Amy Laburda, editorial manager at Palisades Hudson Financial Group. And joining me today is my colleague, Anthony Criscuolo. Anthony is a senior client service manager and our chief investment officer at Palisades Hudson. Today, he's going to help us get into some of the specifics about financial planning for your grandchildren. Thanks for joining me, Anthony.
Anthony Criscuolo 00:34
Hi, Amy. Thanks for having me. It's great to be here. And I'm really excited to talk about grandkids. You know, really what gives people more joy in life than, you know, having grandkids to play with and love? But you're not the one responsible for all the daily work and all the hard part. I have three kids myself, so I'm certainly in the middle of doing all the work part.
Yeah, grandchildren do seem to be a highlight of life. I hear that's a lot of fun, so you may have that to look forward to one day.
But I do also know there can be a lot of financial planning to consider with grandkids.
Yes, definitely lots of financial planning, lots of opportunities, especially. There's a lot of grandparents out there who want to help their grandkids and see them succeed. And so I think it's a great topic to talk about, financial planning for grandparents and just kind of all the ins and outs and ways and opportunities they may look to help.
So I think in
our profession, “helping” is often code for making gifts. There are obviously other ways to help, but I think that's probably where we'll mostly focus today. So besides — there are obviously personal and emotional reasons you might want to help out your grandchildren with gifts, but are there any practical reasons you might want to make those kinds of gifts?
Yeah, definitely. I mean, simply put, gifting, it's about helping, like you said, and it's really about tax planning, often.
A lot of grandparents, maybe who are subject to the estate tax, are worried about minimizing or reducing the size of their estate. A lot of grandparents want to help their grandkids during their lifetimes. They want to gift them assets, see them successful. And so I think it's really just about, you know, everyone's situation is different. Some are subject to the estate tax, some are not. They're helping for other reasons.
You always want to make sure that you're gifting in a tax-efficient way and make sure that you don't send a gift and miss a tax filing for a gift tax return. And so I think it's important to just kind of know the ins and outs of the gift tax regime, the estate tax regime, and understand the pitfalls so you don't make a mistake. A lot of grandparents I've seen give large gifts and never even discuss it with their advisors.
So, it's definitely something that you want to stay on top of and kind of know some of the rules.
So, we've talked in previous episodes: The estate tax really only applies to a small slice of the population. Do these kinds of tax planning strategies you're talking about really only apply if you're in that small high tax bracket, or is it something that everyone should think about when they're making gifts?
Right. Well, really everyone should be thinking about and know the rules when it comes to just gift tax filings,
and certainly reducing your estate is important. So you are right: The estate tax, generally speaking, as it's increased over the years, has affected fewer and fewer taxpayers. The current exemption as of 2023 is just under $13 million per person. So it's generally speaking a very small slice of the population who's going to be subject to the estate tax. Now I will say that number has changed and will likely change again in the future.
It is essentially a tax law, and Congress can always act and change it. And just to give a little history — because I think it's important to understand how high the number is now relative to where it's been — but just 10 years ago, if you go back to 2013, the estate tax exemption was at $5.25 million. So much lower than it is today. And if you want to go back even further, 20 years. So a grandparent who had a grandchild born
in 2003, 20 years ago, now they're 20 years old. The exemption was only $1 million back then. So the numbers can and do change. So even if you're not subject to the estate tax now, it's certainly something that you could be subject to in the future. Obviously your estate could grow, and if Congress ever acts and changes that level to bring it back down to $5 million or even less, all of a sudden you could be subject to the estate tax. So
if you plan to make gifts to your grandchildren already, you may not even know it now, that you're essentially reducing the size of your estate and eliminating, or at least reducing the estate tax, that it may impact you five years from now, 10 years from now. I also think a lot of grandparents want to help during their lifetimes. It's really an investment in their grandchildren's futures. A lot of people want to help pay for education or health care,
if you have any kind of special needs children or grandchildren. And giving during your lifetime in an effective way, planning how much, how to structure the gift to minimize those taxes, I think is really important. So I definitely think understanding the gift tax rules and the estate tax rules will help you make more informed decisions when you're making those gifts and structure them in an appropriate manner.
Amy Laburda 05:44
You mentioned the lifetime exemption just under $13 million. I think it's $12.92 million specifically while we're recording. So how does that lifetime exemption interact with both gift and estate tax?
Right. So it's really like one tax and one exemption. So the lifetime exemption covers all of your gifts during your life, plus whatever you have left over. Any taxable estate will be against that exemption. But there's really one important point, and that's
not all gifts count towards your lifetime exemption. And this gets into what's known as annual exclusion gifts, which is a really powerful tool. I think a lot of, you know, we certainly advise a lot of grandparents who use this tool. It's a very effective way to reduce the size of your estate. And a lot of people also use it because it generally won't trigger a gift tax filing requirement annually. So there's essentially a set amount that you can give that won't trigger a gift tax filing and will not be used towards your exemption.
And that's the annual gift tax exclusion. So for 2023, that amount is at $17,000. So you can give $17,000 to any grandchild, to all your grandchildren, each individually, and it won't count as a taxable gift. There won't be a gift tax filing, and it won't go against your lifetime exemption. And it's also a per person exclusion amount. So if you're married, both you and grandma,
can gift $17,000. So that's really $34,000 per grandchild. So that's a really powerful tool to use. So let's just say you had three grandchildren and you wanted to gift the maximum amount to avoid any sort of gift tax filing, you could gift the $34,000 to all three of them. That's over $100,000 in total that you're giving every year. That's going to substantially help your grandchildren, reduce the size of your estate, and not eat into your exemption at all.
And so that could be a real... So I think it could be helpful now even to put some numbers on that. So let's just run through, you know, I think a pretty basic example and we'll just keep the numbers nice and round now. But so let's just assume that same example, you're gifting the $34,000 per grandchild, you have three grandchildren. So let's just say it's $100,000 a year, it's $102,000, we'll keep the numbers nice and round. And let's say you do that over a 10-year period. So you're going to gift $100,000 a year, 10 years, that's a million dollars over that time period.
And let's assume that you're a wealthy individual and you will be subject to estate tax at your death. So all else being equal, you've reduced the size of your estate by $1 million. So that's $1 million that's in the hands of your grandchildren that they've benefited from, that's outside of your estate. You didn't have to file a gift tax return. You've never had to use any of your lifetime exemption. The million dollars at a 40% top federal estate tax rate equates to a $400,000 estate tax savings.
So that's $400,000 of assets benefiting your family that otherwise would have been a tax payment. So I think that really helps illustrate it. Just if you, you know, doing these annual gifts, getting the money outside of your estate, helping your grandchildren, not triggering a gift tax filing, and then also the benefit of reducing your estate tax. And again, I know the exemption is high today — like we talked about, it could be lower in the future. So if it ever went back down to, say, a $5 [million] or $6 million range, you know
that grandparent out there with the seven or eight million who thinks, oh, the estate tax won't affect me. It could in the future. And so setting these gifts up that way could be a really important tool. So that annual exclusion is definitely something that we use often and help grandparents implement often.
So yeah, even if the gift and estate tax are sort of two sides of the same coin, it seems like lifetime gifts can be a really powerful tool, you know, instead of just saying, “Oh, it doesn't matter which way you go.”
Of course, in addition to the pleasure of getting to see your grandchildren benefit from the gift while you're still around to enjoy that. Now, we've touched on gift and estate taxes, but there is a third tax that we haven't mentioned yet that can be more specific to gifts to grandchildren. What's known as the GST tax, or the generation-skipping transfer tax. Is that another layer of taxes that you usually advise grandparents to bear in mind when they're planning?
Anthony Criscuolo 10:03
Yes, definitely. There's many layers to our tax system, unfortunately. But yes, the generation-skipping transfer tax, or more commonly known as the GST tax. It is another separate tax from the gift and estate tax ,and it's essentially a tax that's directly on gifts or transfers to what's known as a “skip person.” So in this case, very obviously, a grandparent to a grandchild would be considered a skip person. The good news is you also have
a lifetime GST exemption amount, which currently is the same and matches the estate tax exemption amount. So it's currently set at that same $12.92 million. And those numbers are indexed for inflation. So they change. It kind of works in the same way as that lifetime exemption, you know, and you also have the annual exclusion. So it's this, you know, if you gift the $17,000 or if you're splitting gifts or you're married giving the $34,000, those amounts won't eat into that GST exemption.
But it's definitely, you know, could be a very draconian tax if you pay it, because it is in addition to, or on top of, the estate tax or the gift tax. So if you unwillingly or unknowingly, you know, do a skipped gift and trigger the GST tax, it could be a very harsh tax to have to pay. And, you know, there's lots of rules. I don't think that we'll get into kind of the nitty gritty. You can get into things like direct skips versus indirect skips, or
what happens if a trust has multiple generations of beneficiaries that could possibly trigger a gift tax upon a distribution. I think the real important thing is just make sure people are aware of the GST tax, know it exists, and anyone who's possibly worried or subject to it definitely want to be speaking with a financial adviser to understand the tax and make sure that you're not going to structure a trust or some other large gift in such a way that could trigger it.
Amy Laburda 11:56
So possibly bad news for those who didn't know about it before. But on a happier point, you mentioned earlier paying for a grandchild's education or their medical care. Are these treated any differently? Do these have any special properties?
Yeah. So there's also some special rules for certain types of gifts. And you mentioned that the big ones are education and health care expenses. And we all know college is very expensive these days. You know $34,000, even
at that level, a gift often isn't enough to cover one year's worth of college. Sometimes that's just one semester, obviously, depending on where you're going. The tax laws allow for the payment of essentially educational expenses. So let's just assume here it's college tuition. It could be private school tuition for the high school or something as well, or medical payments. So if you have a child who's going through a major medical procedure, or just needs a lot of help medically, you can pay those bills directly
and it's not considered a taxable gift, regardless of the amount. This could be $100,000 of tuition payments or, you know, a surgery or other medical treatment. That's $100,000 out-of-pocket expenses, or even the medical insurance premiums, you know, if you want it to help, because those are certainly expensive nowadays. The key to remember for this type of gift is that it has to be paid directly to, you know, the college if it's tuition, or directly to the doctor or the hospital, if it's a medical payment.
It can't be a reimbursement. You can't just pay it to your child or to your grandchild and then tell them, “Use this to cover those costs.” That would just be a gift to the child, subject to the gift tax rules. But if it's directly to the hospital or to the college, it would not be a taxable gift, doesn't matter the amount. So that's definitely a huge benefit. You know, we — I — work with a lot of clients, and we advise a lot of clients who do this. And it's a way to make sure you're doing it. You can do in addition to, right? So you can do the $17,000
annual exclusion gift of just cash if you wanted to, and you can pay the college tuition. You still won't be triggering a gift tax filing or any sort of issue. So it's definitely something, if you are going to be helping and you want to cover that college, pay the college directly and then send a separate gift, that's kind of separate from that.
Nice. OK. Say a client comes to you, they have a sizable estate.
They're married, and they and their spouse have grandchildren who are in their late teens, early twenties. This couple may not feel comfortable giving each of those grandkids $34,000 between them every year. Do you have any advice for those sorts of couples?
Yeah, definitely. We see this all the time. When you're talking about material gifts, if you're thinking of making material gifts to a grandchild, you really need to be mindful of that grandchild's ability to handle that
type of wealth. And a lot of times you don't know, right? Because you might be dealing with grandkids who are toddlers or babies. And obviously they're not spending the money now, it's just going to grow for them. But will they have access to that money as soon as they turn 18? You don't really know what their financial awareness is going to be, what their maturity is going to be. And so that's where trust can really come into play. I think a lot of times
if you plan on making gifts over a series of years, or you know you're likely going to be making lots of gifts that could add up to a substantial amount of money, you really may want to consider establishing a trust. A trust essentially is a separate entity that you establish as the grandparent, and you appoint a trustee. It could be the child's parent. It could be a third party that you trust. And essentially, you gift the assets not to the
grandchild directly, but inside this trust. And then the trustee controls those assets, manages them, invests them, and holds them for the benefit of your named beneficiaries. In this case, we'll assume it's one or multiple grandchildren. And that way, the assets aren't directly in the hands of the grandchild. So there's a trustee, this kind of third party, who is responsible for managing the money, making sure it's used responsibly.
And you really can control, to some extent, how the assets are used. Ultimately, the trustee is the one administering the trust and following the rules that are in the trust. But you as the grantor, when making the trust, can say, for example, that the assets are meant to be used for education or health care. You could put a provision that says the assets are not to be used to pay any debts of the beneficiaries. So that's a way to add some creditor protection if one of your grandchildren gets into any sort of credit issues.
So, versus making an outright gift, a lot of times those assets are not protected if your grandchild has creditor issues, or if they're just not mature enough to handle that type of wealth, they might use the money unwisely when they're 18, or 21, or at any point. So, that's really where a trust can come into play. And we certainly see this often and help a lot of grandparents establish trusts, whether it's for
kind of a big, one lump sum gift, or whether a grandparent just plans to make these annual exclusion gifts, because over years they could obviously add up. And so, you might think, “Well, if I'm starting when they're just born, after 18 years, that child could have substantial wealth built up.” So, having that in a trust, where there's a little bit more protection, can certainly be helpful.
Sure. And I imagine you're taking advantage of things like compound interest and investing the assets in the trust, too, over time, so it's not just
the gifts you're making, but the growth as well. I think a lot of people hear the word “trust” and automatically go, “That's too complicated. I don't want to get involved with that.” Is the complication something that people should seriously consider? Is that a misconception? Or what are some factors people should think through if they're trying to decide, “Is a trust right for my situation?”
Definitely, I mean, a trust certainly adds some complexity. You have to establish the trust. You usually have to, you will have to hire
an estate planning attorney to draft the trust documents. Often it's ideal to work with a financial adviser to help you understand the tax implications, not only for making the gift to the trust, but once the assets are in the trust, the trust is its own legal entity and has to file its own tax return every year. And generally speaking, trust tax brackets are more compressed. And so you essentially reach higher marginal tax rates at lower amounts of income relative to
individual [Form] 1040 filings. And so usually the income inside a trust is going to be taxed at higher rates compared to if the grandchild held it directly, or if you still held it as the grandparent. And so there's that kind of current income tax versus longer-term estate tax considerations, if you are subject to the estate tax and making gifts to reduce the size of your estate. Those are certainly complications, or
just tax planning considerations, that you'll want to make sure that you understand. So yeah, trusts definitely have additional tax compliance, accounting requirements. It could be a little bit more costly. You have to balance all those costs and considerations before setting one up. For relatively small, one-time gifts, trusts probably don't make sense. For larger, more material gifts, or if you plan to make gifts over a prolonged period, they can start to make more sense.
And then also a lot of it depends on the grandchild, the maturity level. Do you feel like you need the kind of protection and control of the trust? Could depend on the age of your grandchild. If you have a relatively older grandchild who's already in their late 20s, very mature, you might feel very comfortable gifting money directly to that grandchild and letting them use it, knowing they're going to be prudent with it. So there's really no one-size-fits-all approach. There's no one correct answer. It really is personal and kind of depends on
your specific facts and circumstances for your family.
Sure. So with a trust, not to get too deep into the weeds here, I know we don't want to lose our listeners, but you mentioned balancing estate tax considerations and income tax considerations. It seems like you're going to be paying some sort of tax on the assets and the trust, usually, one way or another. Is this something you often advise your clients about, how to handle this kind of balancing?
Anthony Criscuolo 20:21
Yeah, definitely. And I, you know, it's always kind of a balance between current tax, deferring tax and minimizing tax, you know, in the long run. And so sometimes you could be better off paying a little bit more now to save a lot of tax later. Sometimes you're better off deferring the tax now and paying more later. And one thing we haven't touched on, which I think this is a good point here, is the step-up in cost basis, which is, you know, a really powerful kind of estate planning tool and
I guess, let's just define what that is first for listeners, so they know. When you die, the assets in your estate receive, it's really referred to as a step-up, but it's really a reset, essentially. The cost basis of your assets resets to the current fair market value at the time of your death. It could go up, could go down if you have depreciated assets. Let's just give a real basic example. I think it's pretty easy to understand. Say you purchased a stock.
You bought it, your cost basis is $1 million. It was 10 years ago, the stock has appreciated. So now it's worth $2 million. You essentially doubled your money over a 10-year period or whatever it was. So you now have a $1 million unrealized gain. So if you were to — let's say you wanted to gift $2 million. If you sold that stock and gifted it, you would have to pay a capital gain on that million-dollar gain that you had. But if you passed away owning that $2 million stock, the cost basis would reset.
So now the cost basis would become the $2 million. Let's say your grandkids are going to inherit that stock upon your passing. They can then sell that $2 million stock and pay zero tax because of that cost basis reset. So that's a really powerful tool to understand what assets you have, know what their tax position is within your portfolio, and certainly be very mindful of that if you are making gifts. And of course, it depends on whether you're
younger and relatively good health, or if you're older, maybe a little closer to passing away. Generally speaking, knowing you're going to benefit from that cost basis step up, you generally want to hold your lowest basis assets knowing you're going to get that step-up, compared to maybe if you were going to make a gift, gift something that has a higher basis. And that way you're not going to really lose that. Because once you gift it, if it's a true, completed gift, it's outside of your estate, there's not going to be any step-up in cost basis.
So this, again, is something where a financial adviser can certainly help you look at all your assets, understand what your tax positioning is within your portfolio, and really help you make the most efficient gifts. Which assets do you want to gift? What's most appropriate? Should I sell an asset and gift the proceeds? Should I gift the actual stock instead of selling it first? Or certainly, those low-basis assets you very likely want to hold on to and benefit from that
cost basis step-up at your death.
So, we wandered a little from trusts there, but I do think we can say overall that for people who think trusts are just too complicated, we haven't probably disproven that. They are complicated, even though they are powerful and have a lot of benefits. But go back to that hypothetical couple I mentioned earlier who want to give to their grandkids but are a little bit leery about giving them outright gifts, either because they're not responsible or because they're just concerned about what they'll use it for, or a
variety of other reasons. But say their grandkids are younger. You mentioned if you have a toddler grandchild, you have no idea how responsible that child will be. Is there a way other than a trust that you can sort of put some guide rails on that sort of gift?
Yes, actually. There's definitely some other options out there. Not without their own pitfalls, right? Everything has pros and cons. But another option that's widely used is to establish a custodial account. So you essentially can open, you know, usually it's a brokerage account at a major custodian, and it's a custodial account.
You know, under — which is really just a special account under state law that allows, you know, you to essentially open and fund the account, but it's for the benefit of someone else. So very similar to a trust in the sense that, you know, the account owner is really the child, or grandchild in this case, but the person establishing or opening the account is the grandparents and they can fund it. And then that custodian holds the assets and manages it
for them; usually it's invested and you're benefiting, like you mentioned earlier, from compound interest and growing the assets. So when the child reaches the age of majority, which generally is 18 or 21, and that can depend on the exact state law that you're in, then the child, the grandchild gets control of those assets. So it's essentially like a trust with a definite ending period, if you will. And it ends when that child becomes an adult, again, usually age 18 or 21.
So the real kind of issue, or problem, with that again, is that — What is the maturity level of that child at age 18 or 21? That could be an issue. And if you're funding this account when they're a baby or a toddler, you really have no idea. It's very hard to know what that child is going to be like at 18 or 21. And depending on how much assets are going to be in that account, it could become a material windfall for them and how may that affect them. And so that's really
the big question, I think, when kind of talking about custodial accounts and trusts: if the dollar amount, you know, smaller the dollar amount, the more the custodial account usually makes sense. And I also think it's important, you know, no matter what you're doing, but especially if you're going to do a custodial account or a direct gift, is to be open and transparent. Talk to your grandchild. Obviously, you're not going to be talking to an eight-year-old about this, but as they are coming of age, you know, as they're in high school,
getting closer to that 18 or 21, you want to make them aware. You want to start kind of educating them and coaching them about the importance of being financially prudent, about understanding what's in the account, understanding what your intended purpose or use was. And I think a lot of times that could be beneficial to just have the child kind of play an engaged role in it. You don't want them to just be surprised: “Here's an account you didn't know about” and they're 18. I think that often can lead to bad outcomes. So
I think I'm certainly often talking to clients about this, telling them, “When the time comes, you definitely want to be talking about this with your grandchildren and making them aware.” And that also gives you a little gauge or test. If you start to tell a 16- or 17-year-old that they're going to get some of this money soon, and you start to see them looking online at Ferraris or something, you might have a sense that something could be
amiss here. So, you know, just kind of learning and talking to them about this is helpful. And certainly you probably want to involve their parents in this, you know, make sure they're okay with it, and they understand it, and make sure everyone's on board. And, you know, certainly want to talk to the parents, because the other issue with custodial accounts gets into what's known as the “kiddie tax.” So the assets in a custodial account are also taxable, you know, the interest dividends, capital gains in those accounts. Now it's technically the grandchild's account.
So the income is reported under and to that grandchild. So if it's a small enough account, there's probably not enough income. Often the grandchild doesn't have to file their own tax return. But if the taxable income is high enough, and if that's really all the income, right, it's unearned income, it's just passive investment income, that can trigger what's known as the kiddie tax, which really brings that taxable income and has it reported on their parents' tax return or whoever claims them as a dependent.
And so, that can be... We don't really need to get into all the rules. There's a little bit of an exemption for kiddie tax, but they're pretty low dollar amounts. So, really, once it's above $2,500, you're essentially taxing that income at the parents’ tax rate, which often, assuming the parents are working and having some more material income than the grandchild, certainly, it could subject that income to higher tax rates. And then, you certainly want to make the parents aware that this income is going to affect your own
tax return. So that's another kind of pitfall of the custodial account. So again, it's all pros and cons. There's no one-size-fits-all solution. And you just want to kind of understand what are the good and the bad of each strategy and make the best decision for you.
Sure. So another thing, if it's technically the grandchild's account,
and especially if they could get control as early as 18: Is that going to affect need-based financial aid, if a lot of these 18-year-olds are college-bound?
Yeah, no, it definitely can, which is another important consideration. If you know, if you think your grandchild will be, you know, applying for financial aid or may qualify for financial aid for — other than having this asset, it could be a big deal. You know, if they were planning on or expecting to get that financial aid, then all of a sudden they're not going to because they had this large custodial account. You know, that's another consideration to plan for and understand
how that may affect them. So, again, it's not for everybody. And I think you really just need to plan for it and talk to your grandchild, talk to your parents, really make sure you and they understand how it may impact them in the long run.
Regular listeners will know this is my pitch by now, but communication. Communication is very important. It comes up [in] so many of these episodes. While we're on the subject of educational funding,
we've talked about paying for tuition directly. We just talked about the potential impact of financial aid with custodial accounts. But a lot of people are aware that 529 accounts exist and are connected to educational expenses. But how can grandparents really use these accounts if they want to help their grandkids?
Yeah, I know a 529 is a very popular means to save for college for parents and grandparents alike. We have a lot of clients who set these up. You know, they're…
I highly recommend them to anyone, you know, for large or small gifts for helping to pay for college. I guess we'll just get into what a 529 is and then talk about some of the planning opportunities. And you can really almost think of it like a type of custodial account, or a type of trust with tax advantages. You, essentially — these are plans, you know, run by states, and you can open an account, you fund the account, and then all of the earnings and growth inside the account is tax-free.
Interest, dividends, capital gains: you don't pay any tax along the way. And when the intent of the account is to then pay for college, when the child is 18 or beyond college, if they're going to go for an advanced degree or a master's degree, and the withdrawals to pay for those college expenses are completely tax-free. You don't pay any tax on the earnings as long as it's used for a qualified education expense.
And so that could be a really powerful tool. It's almost like an IRA in that way. You're really kind of deferring the tax along the way. You're benefiting from the higher compound growth, because you're not paying that tax every year. And then when you use those funds to pay for college, it's completely tax-free. So it's a huge benefit. And one strategy to kind of get into a planning opportunity here is what's known as kind of the supercharged, or front-loading a 529 gift, and that is because — So gifts to a 529
are taxable gifts if it's above the $17,000 a year under the current annual exclusion. But there is a special provision unique to 529s that essentially allows you to fund five years’ worth of that annual exclusion gift up front in one year and then essentially just spread the gift out over a five-year period. So for tax purposes, it's as if you're making five years of annual exclusion gifts, but you're actually doing it all in year one,
which is a huge benefit, because it really front-loads or supercharges that initial contribution and then allows it to grow over time. So if you do this when your grandchild's first born or very young, say they're one year old, you're going to have 17 or 18 years of compound growth with zero tax along the way. That's a huge benefit. And that compound growth can really pay for college. Oftentimes it can grow enough to pay beyond college. Actually, just a quick,
you know, real client story, because we had a client who did this back in, I think it was 2001 when they funded for these grandchildren who were first born. And they did this five-year gift, where they front-loaded it and supercharged it. And, you know, of course there were no withdrawals for, then, 18 years. And it grew to over essentially $400,000 after that initial contribution, plus all those years of growth. And, you know, that $400,000 at that point, you know, these kids were 18,
that covered undergrad. I mean, even college is expensive, but that completely covered their undergrad. And there's still significant assets left over that could pay for graduate school. Or another great thing about 529s is they can pass within a family. So you could use, if you have leftover funds for your grandchild, your grandchild could just sit on it and wait for them to have children. So your great-grandchildren one day could become the beneficiaries of those 529 assets and it could pay for their college.
So that supercharged gift upfront with all those years of growth, and then possibly more growth if your grandchild doesn't use all of it. You could essentially be funding two generations’ worth of college with that one supercharged gift. You're not using any gift tax exemption. You're not eating into your estate tax exemption. So that's definitely a real powerful tool funding that 529.
Sure, I think that illustrates pretty well why they're so popular, really, as a saving tool.
Anthony Criscuolo 33:52
So to step back a minute, you can have grandchildren born at very different times, depending on your family's composition. Obviously, your children can also be born at different times. But say you have children who are fairly spaced in your own generation, and then they have kids at different times. One has kids relatively young, one waits a little longer, one might wait till they're much older and even
pursue IVF or surrogacy or something, where you thought you were done and you're not quite done. So you can end up having grandkids easily over a 15- or 20-year span. And of course, no one knows how many grandkids they're going to have total.
Right. I know it's definitely common. You know, you don't know what your grandkids are going to look like. You don't necessarily know, you know, whether your children will even have children sometimes, you know, depending on what stage of life they're in or you’re in. So it's not easy to plan.
And every family situation is different. Every state law could also be a little different. And also your children might move. So they might be living in a certain state now. And even, you might be living in a certain state, and then make estate plans, and move. So it's something you want to stay on top of. It's something that you want to kind of periodically revisit. And then of course, state laws are always changing and updating as technology is getting better. You mentioned IVF and other kinds of assisted reproductive technology. Honestly, who knows
what it could look like in 10 years, or 20 years. So it's hard to stay on top of this. I think the key is you want to have enough flexibility in your estate plan to kind of plan for the unknown and the unexpected, but at the same time, you probably want to have some control, right? You might have personal feelings of, you know, what you want to give or gift, or how you want to handle it. If you want to talk about gift equalization, I think this could be a big issue
which is, you know, you might have young grandchildren who, you know, have just been born, and then older grandchildren who you've been funding gifts for 20 years already. And you might be closer to death, so you might feel like that's a little unfair that I've, you know, helped these older grandchildren for 20 years and, you know, my younger grandchildren aren't going to get as much help. So that's a common problem for people who have, you know, grandchildren who are spread out over such a long period.
And, you know, again, there's really no one-size-fits-all, but it's something to be mindful of, talk to your adviser. There's different strategies to kind of handle that issue with gift equalization. You could, you know, just make one large gift to the younger generation to kind of catch them up. If you are young and healthy enough and you, you know, you think you have a long enough time period, you can just kind of stop gifts to the older generation and just continue gifts to the younger until they're caught up or equal. And then of course, you might want to consider, you know, each
fact and circumstance of the families of your children, your grandchildren. Some of your children may be more successful and are more likely to have their own kind of inheritance and financial support for their children, which are your grandchildren, versus another may be less financially wealthy or savvy, and you might feel the need to help them a little bit more. So that's kind of balancing equality and fairness. There's really no one-size-fits-all. But I think just
asking your adviser, talking about different strategies in a tax-efficient manner, because especially if you're going to do one lump-sum gift to a younger grandchild to catch them up, that could have tax consequences. You'll likely trigger a gift tax filing where you'll actually have to file a gift tax return and use some of your lifetime exemption to make that larger gift. And also, you could balance 529s, so you can move — if you are just funding 529s,
you can move assets between family members. So if you wanted to just say, “Oh, these grandchildren had that big supercharged five-year contribution, and their 529s have $200,000 in, versus these younger children don't,” and maybe you're done making gifts, you could then try to equalize the 529s by transferring assets between them. So that's another strategy. So it's definitely hard to plan, right? You don't know what your grandchildren are going to look like. And we didn't even talk about, you know,
adopted grandchildren or step-grandchildren, if your children get divorced, and then now you have step-grandchildren and do you want to plan for them? You can have very specific language in your estate planning documents that can cover every possible contingency. Maybe not every possible contingency, because there's ones that we don't know about, but you could have provisions for adopted grandchildren, provisions for step-grandchildren, provisions for grandchildren who aren't alive when you may pass away. And a lot of that, again, can be,
you know, having assets held in a trust and then having the trust set up that kind of discusses the parameters for distributions for a lot of those, you know, various possibilities.
Right, so on that note, if you have grandchildren who arrive after you've passed away, is that something you would have planned for in your will or other estate planning documents, if you want to be sure that something goes to them? Or is that something that comes up with clients that you've worked with?
Yeah, no, it definitely can come up, you know.
Clients want to know if they have two grandchildren, but one child hasn't had children yet, what happens? And so you generally want to have provisions in your will for unborn grandchildren. And so that way, your wishes are expressly stated, it's understood, it's not like people will be fighting about it after you're gone. And just because you may not know, or you might not think, maybe you have a child that doesn't think they're going to have
kids and they've said that, but then, you know, who knows, they may end up having a kid later in life that's unexpected. So you want to just have that planning flexibility. And every state can be a little different. So whether they're automatically included or not included, especially when you get to step-grandkids or adopted grandkids, you know, state laws can be different. So I think it's really just important to understand that there's all these different possibilities out there. And, you know, you want enough flexibility for your executor, your trustee to,
you know, just follow your wishes. You know, if you intend assets to go to some of these grandkids or not go to some of these grandkids, you want to make sure that that's, you know, fairly direct and stated in your documents. So, you know, kind of the more planning, the better around some of those issues, and especially with grandkids, because a lot of, you know, unfortunately, there could be some, you know, people who pass away before they ever see or meet their grandkids. But if there's, you know, a trust involved and they plan and want to provide for those grandkids,
you certainly have a way to plan for that before your death and establish trusts that ultimately will benefit your grandkids.
So it seems like with a lot of estate planning, you want to have the language in your documents clear and unambiguous, but you also want to talk to your executor, your trustee, make sure they're aligned with what you intend so they can use that flexibility if they need to.
Yeah, definitely. Like you said, communication. A lot of communication.
Amy Laburda 40:45
So, Anthony, we've covered a lot of ground today. Were there any other thoughts you had, just generally about financial planning for helping grandchildren, or involving grandchildren in your big financial picture?
Yeah, I think there's one important point that I think I just want to get out there and make sure it's in everyone's minds. And that is that there is not one correct way. Because I get all the time, you know, “Well, what's the best way to do this? What's the correct way to do this?
What are your other clients doing?” And it really is, in financial planning in general, it's meant to be highly unique, personal, customized. You really want to take into account your specific family facts and circumstances. Your family is unique and different from all other families. What works for one, or what is generally regarded as the “right way” to do a certain structured gift or financial planning, may not be right for you.
So I think it's just understanding that, you know, getting into your facts and circumstances, talking to your family, and even within your family, you might, you know, if you have different children and different grandchildren, you might want to structure gifts, you know, one way for one set of grandchildren and structure gifts another way for another set, you know, based on maturity, facts and circumstances, wealth of your children, all sorts of, all sorts of factors, their ages. So I think, you know, it should be
personal and customized. And you shouldn't really be looking for this kind of one-size-fits-all solution and really just be aware of, you know, working with an adviser or a tax planner or your estate planning lawyer, who's going to really take the time to get to know you and your family, and really want to set something up that is unique and customized to you. Because there is no one-size-fits-all, there is no one correct way to do things. And, you know, I work with
different clients all the time, and we structure things very differently, you know, for different clients based on their facts and circumstances.
So when you're working with an adviser, you shouldn't expect to just be plugging numbers into a spreadsheet. You should be expecting to describe your children and grandchildren a little bit, and getting into the personal part with them too.
Yeah, definitely. And that, I mean, I think I can even close with this point. It really is about your goals, right? Knowing what your goals are.
What are your objectives? And it's important for even me as a financial advisor to understand, it's not always about minimizing taxes or maximizing a rate of return. No client has ever walked into my office and said, “My only two goals are to pay as little tax as possible and die with as much money as possible.”
That doesn't happen. We all are living lives. We're people. We have families, children, grandchildren. And it's really about knowing what your goals are. People's real goal is happiness maximization. They want to have a joyful and fulfilling life. And their wealth is just a means to achieve those goals. And grandchildren and children and gifts. And certainly you want to minimize taxes and, you know,
have a prudent overall financial plan to maximize your wealth. But it's really about what the wealth then provides. So knowing what your goals are plays into that not one-size-fits-all solution that I mentioned. It really is different for every family. Every family may have a different set of goals or objectives. What your happiness and joy and fulfillment could be [is] very different than another family's. And I think at the end of the day, that's really what
effective financial planning is about. It's just about helping people live happy, fulfilling lives.
Well, I don't think we're going to do any better than that for a place to end. Thank you so much for joining me today, Anthony. It was great talking to you.
Absolutely. Great to be here. Great talking to you.
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin;
the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. Our firm has written two books: Looking Ahead: Life, Family, Wealth, and Business After 55, and The High Achiever’s Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes, and performers.
Both books are available on Amazon, in paperback and as e-books.