Monday, 20 May 2019
You thought you couldn't love anyone more than your own children — until you had grandchildren.
They bring you so much joy, and their future is extremely important to you. You want to start planning now to make sure they have opportunities and financial security for many years to come.
Whether you want to fund their college education, leave them a lump sum or provide other financial protections, there are numerous instruments and strategies you can use to help you accomplish your goals.
Helping fund a grandchild's education is a top priority for many grandparents. A 529 Qualified Tuition Plan is a tax-advantaged savings plan that makes it easy for grandparents to provide for a wide range of education-related expenses.
When you open a 529 plan, you are the custodian of the account and maintain control of the funds, and your grandchild is the beneficiary; 529 plans are individual, so each grandchild has their own account.
The money you put into a 529 fund is not tax-deductible. But the earnings are not typically subject to federal income taxes if used for qualifying educational expenses. These include many college-related expenses such as tuition, fees and books. Recent changes to the tax laws now allow most 529 funds to be used for qualifying expenses prior to college, such as private school tuition.
There are no income restrictions, but the maximum gift amount cannot be more than the qualified expenses for the beneficiary. You can, however, front load a 529 plan with up to $70,000 with no gift tax, but no additional contributions can be made for the next five years.
A Traditional Individual Retirement Plan (IRA) is an excellent financial tool for passing wealth on to a grandchild.
This is because if you leave a Traditional IRA to your estate, it could be subject to taxation. However, if you leave it to a grandchild, the funds will continue to grow on a tax-deferred basis. The child's life expectancy will be used to determine Required Minimum Distributions (RMD), and the distributions will be taxed at the child's tax rate, which will most likely be a lower rate.
A common way to pass a Traditional IRA to your minor grandchild is by establishing an IRA Inheritance Trust, which will be managed by a reliable trustee who will make sure the legally required minimum distributions are taken each year and the assets are managed according to your wishes.
Because grandparents are considered extended caregivers of their grandchildren, they are able to purchase life insurance in the grandchild's name. Doing so offers the grandchild numerous benefits and opportunities, including the ability to purchase additional insurance throughout their lives and at the standard rates regardless of any factors, such as health problems, that would typically cause rates to increase.
While not considered an investment, life insurance does offer financial protection as well as some potential tax benefits. While policies vary greatly, some offer cash value that accumulates on a tax-deferred basis, and often there are no tax consequences for borrowing against the policy's cash value. These borrowed funds can be used for a wide range of expenses including the grandchild's education, starting a business, purchasing a home or paying bills.
Providing financial resources for your grandchildren should be just one part of a comprehensive, multi-generational financial plan.
Careful management of your assets today is critical, while protecting your grandchildren with tools like long-term care insurance can be equally important. What's more, your plan should tackle complicated issues like who receives which assets, and how and when they receive them. It can also include how you wish to pass along your personal valuables like jewelry and art. It should address any charitable donations you want to make and take all tax liabilities into consideration. Ensure that you work with a financial planner, a lawyer and an accountant in addition to your insurance agent to make sure that you're creating a comprehensive plan that will serve your family well and protect it for future generations.
There are many questions, but there are also many solutions. At BBVA, your private banker will work closely with the BBVA Global Wealth team to create strategies and plans to provide for the long-term financial security of you and your family for many years to come.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or financial advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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