As the economy continues to create financial struggles among families, the pressure on New Jersey grandparents to help not just their children but also their grandchildren continues to grow. However, the ways that grandparents choose to help can make a huge difference in their own future financial stability. In the worst case scenario, excessive or poorly planned gifts made to children or grandchildren can end up costing the grandparents and their heirs thousands or more in estate and gift taxes.
The Bureau of Labor Statistics reports that in 2010, older Americans (defined as ages 55 or older) spent over 143% more on their grandkids than the average from a decade earlier. And a survey by MetLife found that that a third of these grandparents provided support for their grandchildren even as they felt concern about their own financial futures. The situation is worsened by a weak economy, and in some circumstances, financial hardship on the part of their children in the wake of a divorce or excessive loads of debt.
Regardless of the reasons that prompt grandparents to gift, there are numerous ways that grandparents can help support their loved ones without incurring future financial woes or saddling their children or grandchildren with estate or gift taxes now or upon the death of the grandparent.
Among the methods recommended by financial planners are dividing up contributions on a yearly basis to the extent allowed by gift taxes, making loans instead of gifts, and putting the funds into investments that allow withdrawals free of tax consequences. Other options are available as well, but the most important thing to remember is that each family's circumstances are different, and none of these techniques should be employed without sound advice from a financial professional.
Whether giving just out of love for your children and grandchildren, or helping to sustain them in times of financial trouble, the important thing is to optimize the value of each gift for all your heirs. Federal estate or gift taxes often apply, and estate and gift taxes may also vary from state to state, especially when one party lives in New Jersey the other in a different state. Having a financial strategy in place with full comprehension of the legal ramifications of gifting can leave enough money in the grandparents' coffers to continue to help out as needed down the road, while also maintaining their own financial stability.
Source: The Wall Street Journal, "Are You Coddling Your Grandkids?" Kelly Greene, Sept. 14, 2012