A Grandparent’s Guide to Gifting
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
A frequently discussed topic with our clients who have grandchildren is the best way to gift money to the next generation. The account to utilize depends on the goal for the money. Will the funds be earmarked for college, a first car/home purchase, retirement, etc.? Do you want to maintain control over the funds, or are you comfortable handing that control over once the grandchild becomes an adult? Let’s dive into the pros and cons of a few potential investment account options grandparents can use.
529 College Savings Plans
A 529 plan is a tax-advantaged investment account designed primarily for education expenses. This includes, but is not limited to, tuition, room and board, books, and K-12 tuition (up to $20,000/year).
Pros:
- Tax-free growth and withdrawals when used for qualified education expenses.
- Many states offer a state income tax deduction or credit for contributions. For example, Wisconsin offers a tax deduction on contributions up to $5,280/person for 2026.
- The account owner (parent/grandparent) retains full control indefinitely.
- For 2026, you can contribute up to $19,000 per beneficiary ($38,000 for a married couple) without gift tax filing, or “superfund” up to five years at once (up to $95,000 single or $190,000 married).
- If funds go unused, up to $35,000 can be rolled into the beneficiary’s own Roth IRA over time (subject to the account being open 15+ years, annual Roth IRA contribution limits, and the beneficiary having earned income).
- Excess funds can easily be transferred to another family member. For example, if one grandchild doesn’t go to college, any remaining funds can be transferred to another grandchild to use toward their qualified education expenses.
Cons:
- Non-qualified withdrawals trigger income tax plus a 10% penalty on earnings.
- Investment options are limited to what the plan offers.
Best For: Clients whose primary goal is to fund education and want to retain control of the money.
UTMA/UGMA Custodial Accounts
An UTMA/UGMA account allows an adult to manage assets for the benefit of a grandchild until they reach the age of majority in their state (typically 18–21). At that point, the grandchild gains full, unrestricted control.
Pros:
- There are no contribution limits; however, any amount over $19,000 ($38,000 for a married couple) requires gift tax filing.
- No restriction on how the money is ultimately spent. The funds can be used for education, a car, a first home purchase, etc.
- Broad investment flexibility (stocks, bonds, mutual funds, and in some states, even real estate or other property).
- Simple and inexpensive to open at most brokerage firms.
- For 2026, the first $1,350 of a grandchild’s annual investment (unearned) income is tax-free, and the next $1,350 is taxed at the grandchild’s rate (oftentimes 0%). Investment income typically includes interest, dividends and capital gains.
Cons:
- The gift is irrevocable. Once contributed, the money legally belongs to the grandchild, not the donor.
- Once the grandchild reaches the age of majority (18-21), they can use the funds however they wish, with no strings attached.
- If investment income is above the $2,700 threshold, unearned income is taxed at their parent’s marginal rate (also called the “kiddie tax”), which can erase some of the tax benefit for larger accounts.
- Counted as the grandchild’s asset on FAFSA and assessed far more heavily than a parent-owned account, which can reduce need-based financial aid.
Best For: Clients who are comfortable giving up control at adulthood and want maximum flexibility in how the gift is eventually used.
Individual/Joint Brokerage Accounts
Some grandparents simply open a standard brokerage account in their own name(s). They invest the funds with the intent of gifting to the grandchild later on.
Pros:
- Maximum flexibility and control. The grandparent decides if, when and how much to eventually give.
- No restrictions on investment choices or use of funds.
- Simple and inexpensive to open at most brokerage firms.
Cons:
- No tax-advantaged growth. Investment income and capital gains are taxed each year at the grandparents’ tax rate.
- Assets remain part of the grandparents’ estate for Medicaid look-back and creditor purposes until actually transferred to the grandchild.
Best For: Clients who want to retain complete flexibility and aren’t ready to commit to an irrevocable or restricted structure.
Trump Accounts
Trump Accounts were created by recent legislation passed in 2025 and first became eligible to open in July 2026. This account is basically a modified version of a traditional IRA, with the intention of jump-starting retirement savings as early as when the grandchild is born.
Pros:
- Children born between January 1st, 2025, and December 31st, 2028, are eligible for a one-time $1,000 contribution from the federal government.
- Children under age 10 (and born before January 1st, 2025) that live in a ZIP code with a median household income under $150,000 may qualify for a one-time $250 contribution from the Michael and Susan Dell Foundation.
- Tax-deferred growth on investments (in a restricted set of low-cost US index funds during childhood).
- No earned-income requirement for contributions during the growth period, unlike a normal IRA.
- Anyone can contribute to the account. This includes parents, grandparents, other relatives and even employers (up to $2,500/year).
Cons:
- Lower annual contribution limits compared to other accounts. Limited to a combined $5,000 per year across all contributors (indexed for inflation after 2027).
- Individual contributions are made with after-tax dollars, meaning no tax deduction on contributions.
- Money is generally locked up until the grandchild turns 18, and full access follows traditional IRA distribution rules (including penalties for early withdrawal) afterwards.
- Less efficient than a 529 specifically for education funding, since 529s offer higher contribution limits and no restriction on investment types.
Best For: Clients who want to give a long-term financial head start for retirement, especially if the grandchild was born in the 2025–2028 window and qualifies for the $1,000 government deposit.
We find that many families end up using a combination of these tools. A 529 remains hard to beat for education-specific goals. UTMA/UGMA accounts offer flexibility at the cost of control, and individual/joint accounts offer the most control at the cost of any special tax treatment. Trump Accounts can be considered for long-term retirement savings for the grandchild.
For grandparents, gifting can be about much more than transferring assets. Whether you are helping fund an education, a first home, or a future retirement, a thoughtful gift can be a meaningful way to support the next generation and create a lasting impact for your family.
Please reach out to your Shakespeare Financial Advisor at 262-814-1600 to discuss your gifting goals and determine which accounts are best for your situation.