Outline:
Dear Quentin,
What options are available to set up something for your grandchildren, who are 4 and 2 years old? Savings bonds are no longer available at banks. Purchasing silver and gold bars might be too expensive for your budget. You’re on a fixed income, but you’d like to give them a small gift. You’ve already named them as beneficiaries on your 401(k). You’re curious about what others typically do for their children or grandchildren.
Grandmother
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Dear Grandmother,
U.S. savings bonds can still be purchased online, only through the official government site TreasuryDirect.gov. U.S. Series I Savings Bonds are available for Americans via TreasuryDirect. The minimum investment is $25. These bonds offer protection against inflation and are often favored by grandparents.
Demonstrating confidence in a young person’s potential is invaluable, whether through providing stock gifts or 529 plans for their educational future, especially considering that the previous generation may not have had similar access to education. You can keep it straightforward, and even a few thousand dollars can make a significant difference in expanding their opportunities down the line.
You have the option to provide your grandchildren with a high-quality education or to educate them on the concept of compound interest. Additionally, you can establish custodial accounts, which are set up under either the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act. UGMAs usually include investment securities, whereas UTMAs may contain a wider range of assets, such as property.
You can keep it fairly straightforward, and even a few thousand dollars might help expand their perspectives in the future.
With these kinds of accounts, you can benefit from the annual gift tax exclusion, which is $19,000 per individual for 2025 and 2026. The lifetime gift tax exclusion will increase to $15 million in the coming year, up from $13.99 million (though this amount may adjust in the following years as your grandchildren grow older).
Any funds placed in this type of account are considered a permanent gift, which means the money is no longer part of your estate, and your family members won’t receive a tax benefit from an increase in the asset’s value at the time of your death. (Irrevocable trusts may include protections against wasteful spending; UTMA assets do not.) Take note of potential “kiddie tax” implications (where taxes are applied at your rate to stop families from evading tax obligations).
Courts have decided that 529 plans are considered gifts for tax reasons, despite being set up under a parent’s name. Establishing tax-friendly 529 accounts for your grandchildren not only assists with their educational expenses but also creates an expectation that they will pursue higher education.
Ensure you have sufficient funds reserved for the rest of your life and your spouse’s life as well, provided they are still around. Also, establish an emergency fund to cover unforeseen costs, such as damage to your home from a storm or medical needs for you or your spouse requiring long-term care. Once you’ve analyzed your income and expenses, you can set up those 529 plans.
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Supporting a 529 plan
You have the option to donate any amount to a 529 plan, depending on your state’s maximum limit (typically hundreds of thousands of dollars). By 2026, beneficiaries can utilize up to $20,000 annually for K-12 tuition, with broader support for trade school and homeschooling costs. Additionally, you can contribute up to the specified annual gift-tax exclusion without needing to inform the IRS.
Just like with a 401(k) or IRA, these contributions accumulate over time.As Fidelity notesA $50 monthly contribution might add up to over $12,800 in 15 years; a $150 monthly contribution could exceed $38,000 after 15 years; and a $250 monthly contribution might result in almost $64,000 for the recipient after the same duration.
These projections illustrate the potential growth of a 529 plan, based on an average annual return of 4.5%. They are not indicative of any real investment and do not consider taxes, fees, expenses, or inflation, which could lower the actual returns, according to Fidelity. Contributions to a 529 plan are made using money that has already been taxed. As with any investment, there is risk involved, and previous performance does not ensure future success.
Demonstrating confidence in a young person’s future holds immense value, whether through investing in stocks or setting up a 529 plan.
If used for eligible expenses, 529 plans offer tax-deferred growth and tax-free withdrawals for education-related costs such as college, university, or vocational school tuition and associated fees, as well as K-12 education expenses (up to $20,000 annually beginning in 2026) and student loan payments with a lifetime cap of $10,000, according to Fidelity.
Approximately two-thirds (68%) of parents and one-fourth (23%) of grandparents surveyed by Fidelity indicated that saving for their children’s or grandchildren’s future education is a primary financial objective,” the financial services firm notes. “However, numerous individuals opted not to establish a 529 plan account, preferring to keep college funds in a standard savings or investment account, if they save at all.
To ensure your grandchildren receive an equal share in the future, you can modify how assets are distributed in your will or trust, decreasing their portions by the amount you’ve already provided. A “hotchpot clause” in your will promotes fairness by effectively subtracting prior gifts from each heir’s inheritance, calculating retroactively what each person has already received.
You did not share your age or financial status, so I will assume you have sufficient funds to retire comfortably and support yourself until the end of your life, while also providing your grandchildren with a strong beginning. It is a blessing and a chance to have a lasting impact on their lives, even after you are no longer here.
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