General Life Insurance Topics
Gift for a Lifetime for Grandchildren
Well, Grandma and Grandpa, another holiday season has passed by. The tinsel, Christmas tree, manger scene, and toy Santa are all tucked away in their respective storage containers where they will remain until we are reminded again by our retail store friends it’s time to buy joy and happiness for our posterity. Frantically, we will list each loved one and attempt to match them with something they will enjoy and cherish.
Wouldn’t it be nice if the lyrics, “place beneath the Christmas tree what you think I’d like” would be met with robust joy. Unfortunately, we will walk away from the holiday gift giving with some melancholy, wondering how long the battery operated spaceship will fly, who will remember where they got the new basketball, or how long the excitement of having a new cell phone will linger. The drone will crash, the new dress will fade, the computer game will lose its appeal, and the new bike will get run over in the driveway. Why don’t we feel satisfied? Year after year we’re in the same old gift giving rut with the same old results. Maybe it’s time to kick out the ends of that rut and do something different than most others do. How about giving something which never becomes obsolete, never goes out of style, never loses value, and brings real happiness at a time when it is needed the most.
Here are four ways for you as grandparents to be financially involved with your grandchildren’s’ future:
1. Contribute to a 529 qualified tuition plan.
Named after section 529 of the Internal Revenue Code, this program allows a sponsor to contribute money to a college savings account with the interest accumulating income tax free. This is a state sponsored plan where contributions must be made by contributors for a specified beneficiary, and the ownership of the account remains with the account owner until the beneficiary begins drawing on the proceeds.
Timing of the distributions is vital to the beneficiary due to the impact those distributions may have on the amount included to determine financial aid to students. It is suggested to wait if possible and use those funds the very last year since there won’t be a need to account for assets used to determine assistance after graduation, providing higher education opportunities are not to be provided for.
Two types of 529 plans are available–a prepaid tuition plan where cost of tuition is locked into current prices, or a savings plan where sponsor accumulates future college funds through contributions and investments. Since these funds can be used in any state which offers such a plan, it doesn’t really matter in what state your grandchild will be attending school; so look around and find the plan which best suits your investment objective. Even though there doesn’t appear to be a maximum you can accumulate, it wouldn’t hurt to find out if the particular state has limitations on the amount which can be invested and how much can be accumulated.
2. Coverdell Education Savings Account (ESA).
Similar to the 529 in the objective of depositing money into an account while you are saving for college and then withdrawing for educational expenses, this account has the unique distinction of requiring the account to be in the name of the beneficiary rather than the account owner and allowing the proceeds to be used for certain elementary and secondary education expenses, i.e. tuition, fees, books, and supplies, along with the use for higher education. It appears this may also be used for other professional trade or graduate schools as well.
Where the 529 plan’s contributions are liberal, the ESA is limited to $2000 per year; so if this is to be used for cash accumulations, the sooner deposits get started the better.
If the original beneficiary decides not to use the accumulated funds and another member of the family wants to, the account owner simply changes the name of the beneficiary with no tax consequences.
3. Custodial Roth IRA.
Many children work before they reach age 18. In keeping with good financial planning, a young person should be encouraged to set aside part of their income for later use. Placing those savings in a Roth IRA could be a smart financial move for those wage earners. Since some financial institutions can’t let minor children open a Roth IRA on their own, many institutions will let parents act as a custodian on a Custodian Roth IRA for the benefit of their children.
To set up a Custodial Roth IRA, the young person needs to meet all the same requirements as an adult would. They must have earned income, and their contributions are limited to the lesser of total earned income and the current maximum set by law which for 2020 is $6,000.
As a grandparent you can gift to the young investor up to the amount he or she earned which he or she deposits into the Custodial Roth IRA account.
These deposits then are not deductible to the recipient, but the interest is accumulated and distributed income tax free.
Your gift is recorded and can be used against gift and estate taxes due later on.
What a great way to set up some very meaningful conversations regarding financial matters with a young teenager.
4. Cash Value in Life Insurance Policy.
You may be like many retiring who want to financially help their grandchildren but just don’t have the discretionary dollars to set up some exotic plan for each of those children.
This is where permanent life insurance can assist you in your desires. As the years have gone by and you have faithfully paid your premiums, the cash value of your policy has increased. Your need for a large death benefit may not loom so big to you anymore, so the opportunity to use the cash value as a gift to your grandchildren may be very meaningful to you. You can take a loan against your policy without any questions being asked regarding the purpose, and then if you choose you can pay back the loan at your discretion or let it be paid from the death benefit amount on your passing.
In the battle for financial equality, the two extremes of the spectrum are attended to by either the wealth of families being sufficient to pay their own way for higher education, or by government welfare programs which attend to those higher education costs. Left in the middle is a group of young people who through no fault of their own cannot qualify for government assistance, nor do they have sufficient income to pay for additional schooling.
At a recent family reunion college expenses were being discussed. One family because of their income level had three children on pell grants and other government programs, receiving an education at public expense–while another family whose income was too high to qualify for assistance was struggling to find a way to help their three children attend the same institution of higher learning. The conversation had to change quickly to other subjects because of the glaring example of one family benefiting from being on welfare and the other making too much to qualify for that help.
What a fortunate event it would be in your grandchildren’s lives to be able to say that with a little hand up from Grandma and Grandpa they were able to make their own way in life. Planned for properly, no one needs a hand out–they just may need a hand, and you just might be able to do that.
Christmas will roll around again next year. What blessing will your gift be in someone’s life? Consider talking to your financial planner today and setting up an action plan for tomorrow.