But it doesn't need to be such an either/or proposition.
Happily, a little research yields plenty of creative ways to provide for the next generation beyond dipping into your own hard-earned savings.
The alternatives include everything from special investment strategies, to estate planning, to savings plans that let you save for your loved ones on your terms. In short, there's a whole host of options that make the ability to help out a family member feel like a positive again, instead of a mandate to sacrifice your own comfort and stability for theirs.
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Contribute to a 529 plan
If you know that you specifically want to support your grandchild's education, there's no better way to make that happen than by investing in a 529 plan . Named after the section of the Internal Revenue Code that authorizes them, a 529 is an investment account that allows your money to both grow and be withdrawn tax-free. (So long as it's used to cover college expenses like tuition, board, books, and other necessary supplies.)
The plans are state-sponsored, meaning your area will have its own unique options and investment structures that you can learn more about here . But in the majority of states, contributing to a 529 will earn you a deduction on your taxes, and annual contribution limits are often quite high. (They begin at $235,000 for some states.)
However, it's important to note that any contribution to a 529 is considered a "gift" by the Internal Revenue Service, so those hoping to avoid the gift tax will want to keep their contributions under $15,000 a year. (We recommend setting up automatic monthly deposits, so your money can grow out of sight and out of mind.)
Or, if you have the funds available and you prefer, you can deposit a lump sum of $75,000 upon opening the account; you just won't be able to contribute again for five years.
Amorello is a particular proponent of the 529 plan for its flexibility, noting, "Contributing to a 529 Age-Based Investment Strategy gives the grandparents options on how conservative, moderate, or aggressive fund choices should be. As the child nears college age, the balance of investments transitions appropriately, from more stocks to more bonds, in order to help your funds grow predictably."
Adding to that flexibility is the fact that anyone can contribute to the account, and that even if the original beneficiary elects not to go to college, or selects a cheaper option than predicted, the beneficiary can be reassigned in order to use up the remaining funds.
Write them into your will
The thing about unexpected expenses is that there's absolutely no way to predict when they'll crop up. So one way to make absolutely certain that you won't end up needing the funds that you set aside for your grandchildren is to write them into your will.
That way, you'll know you've truly set aside all you safely can for your grandchildren, without having to grapple with the likelihood of a medical event, or stress about the penalty for an unplanned withdrawal from, say, a 529 plan in the process.
It's like they say on airplanes: Don your own oxygen mask before attempting to help anyone else. If you run out of retirement money during the course of your life, it doesn't help anyone least of all your grandchildren. This is the money that you saved for your retirement, so leaving instructions for its disbursal in your will ensures that you meet that goal before setting another one.
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Make them your life insurance beneficiary
Along the same lines as recognizing a grandchild in your will, you can also assign a grandchild as your life insurance beneficiary, meaning they would be the one to receive the payout from your insurance company in the event of your death during the covered term.
In fact, many companies let you list multiple beneficiaries who can either divide the payout evenly or receive specific percentages that you set yourself. It's also easy for you to redesignate the beneficiary, should circumstances change somehow, and you can even specify a contingent beneficiary a second choice to receive the payout, should your first choice be unavailable.
If you don't designate a beneficiary , however, the payout will be added to your estate, which opens it up to being argued over by creditors and lenders. And since the whole point of paying into a life insurance policy is to make sure loved ones are financially provided for in your absence, setting a grandchild as your policy's beneficiary is a no-brainer.
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Arrange to cover your estate taxes
Speaking of insurance, if you're a high earner whose estate is going to qualify for estate taxes, Amorello suggests taking out an insurance policy where the funds are specified to pay off those taxes. "That way, it's no imposition on a child or grandchild's actual inheritance."
At current levels, which affect only inheritances of $11 million per individual or $22 million per couple, most American families will have absolutely zero interaction with federal estate taxes . (The Center on Budget and Policy Priorities estimates that just 2,000 families will pay estate taxes in 2020.)
However, some states have their own estate and inheritance taxes, and the federal exemptions are fluid; they roughly doubled in 2018, and they could always change again, especially if someone new moves into the White House in 2021.
But the bottom line is that your insurance is for you, so make sure you're selecting a policy with fine print and riders that make it work that way: as a cushion between your loved ones and financial hardship.
Gift money
Another way to balance out potential estate taxes which can be as high as 40% is by gifting money to your grandchildren during your lifetime. Amorello explained: "Gifting money actually can help grandparents lessen their own net worth to lower estate taxes. Because if you're leaving behind an inheritance, but half of it is going to the estate taxes, that can be a daunting realization."
She emphasized that if you take this option, it's crucial to work within federal limits, as gifts exceeding $15,000 per grandchild per year will run you into the gift tax. (Which is paid by the donor, and probably not the way you want your retirement savings to be eaten up.)
But there are some exemptions to gift tax law: Monetary gifts in excess of $15,000 can remain tax-free, as long as they go toward medical or educational expenses, and are paid directly to the institution.
Do your research
One fail-safe way to help out your grandchildren across the board is by staying up to date on any changes to the law that will affect inheritances. One recent change that Amorello highlighted is buried within the Secure Act , which passed in December 2019 and is intended to help Americans save more and save better for retirement.
You're probably already aware that the bill made it easier for small business owners to offer retirement plans, and raised the required minimum distribution age from 70 1/2 to 72, but you might not have noticed one provision affecting what's called the stretch IRA.
"Beneficiaries of IRAs used to be able to take income from an inherited IRA over the course of a lifetime, but now there is a 10-year limit," Amorello explained. Under the new law, anyone who inherits an IRA will have to empty it within 10 years of the death of the original account holder, devastating its growth potential .
As Amorello noted, changes like this one affect income and estate planning across the board, so keeping abreast of them now can help your family avoid a scramble of research and fact-finding during what will already be a traumatic time.
Consider a trust
Maybe you've mentally ruled out a trust fund , assuming they're just for the ultrarich, but they're actually an option well worth considering, no matter your income level.
At its heart, a trust fund is an account that gives the grantor control over how and to whom it pays out. Many do require fees to run, and in order to formally set one up, you'll need to meet with (and yes, pay) an estate attorney. But at the end of the day, what you're paying for is the assurance that your intentions for your assets will be followed to the letter even after your death, and that peace of mind is priceless.
Establishing a trust fund is a legal way to avoid or at least defer taxes, and it can be stocked with a whole range of assets, including real estate, business interests, and even life insurance policies. In essence, it's a way of consolidating those assets and moving them to heirs swiftly and efficiently, without getting the whole process tangled up in the red tape of the probate process .
Amorello specifically recommends a trust for situations where a gradual payout over time might be more ideal than a lump-sum inheritance, like to a grandchild who has struggled with money management in the past.
"A good trust can be very specific about who gets what, when they get it, and how much they can have at a time," she advised. Much like crafting a will, building a trust gives you the ability to set your own terms for the eventual payout, choosing language that has the best interests of both you and your grandchild in mind.
Introduce your grandchild to your financial adviser
And we've saved Amorello's favorite piece of advice until last. You know the saying about giving a man a fish versus teaching him to fish? Nowhere is it better applied than to the practice of building solid money habits.
"Introduce your children and grandchildren to your financial adviser to help them help with saving and planning as soon as possible," Amorello urged. "A good, family-based practice works with all generations to set everyone up for success. The younger you are when you start working with an adviser, the better off you'll be in the long run. Especially if you are planning on leaving behind a large inheritance, having a professional guiding your grandchildren toward prudent investment strategies can help grow the funds during a time in their life where they likely don't yet need it."
Most schools are woefully lacking when it comes to teaching kids about money management, so tackling that task yourself will likely prove indispensable to your family's future financial health. Plus, while advisers will take a small fee based on client needs, Amorello noted that most firms will take that fee from the grandparents the existing clients to start, turning this invaluable learning opportunity into even more of a gift.
Because ultimately, isn't that what this is all about? Being able to provide financial support to a grandchild should feel like a gift, because it is. And by implementing one or two, or all! of the suggestions on this list, you can help ensure that that gift goes both ways.
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