The best way to save for grandchildren depends on your goals, with top options including 529 plans for tax-advantaged education savings, Custodial Accounts (UGMA/UTMA) for broad use (any expense, transferred at adulthood), and High-Yield Savings Accounts/CDs for simple, low-risk growth. For long-term, flexible wealth building, custodial accounts or even trusts offer control and growth potential, while 529s are ideal for college funding, and simple savings accounts offer easy access for younger children.
Where to store savings for grandchildren
You can gift a grandchild up to the annual gift tax exclusion amount (around $19,000 per person in 2025/2026) without any tax implications or reporting; gifts exceeding this amount must be reported on a gift tax return (Form 709) but only count against your substantial lifetime gift tax exemption (nearly $14 million in 2025), meaning you likely won't pay tax until you've given away massive sums over your lifetime. Married couples can combine their exclusions to give double.
Some of the most common routes include:
Custodial accounts are another type of account appropriate for grandparents to open for their grandchildren. These types of accounts are managed by an adult family member on behalf of a minor (someone under the age of 18 to 21, depending on state law).
Step-Up in Basis for Inherited Assets
One tax advantage of leaving assets after death is the step-up in basis. This provision allows heirs to inherit assets at their fair market value at the time of death, effectively resetting the capital gains tax to zero for any appreciation during the decedent's lifetime.
Taking both 7 year periods together means that you need to know how much of the NRB has been used on chargeable transfers ('chargeable' gifts) for up to 14 years before death. This is what's known as the 14 year shadow (or sometimes the 14 year rule).
Yes, you can give your son $100,000 tax-free in 2025 by utilizing the annual gift tax exclusion and your lifetime exemption, but you'll need to report the gift to the IRS on Form 709 since it exceeds the $19,000 annual limit, though you won't pay tax unless you exceed your much larger $13.99 million lifetime gift/estate tax exemption. The gift is considered yours (the giver) for tax purposes, not your son's.
The 529 grandparent loophole refers to a change in the FAFSA (Free Application for Federal Student Aid) for the 2024-2025 school year, where distributions from 529 plans owned by grandparents (or other non-parents) are no longer reported as student income, meaning they won't reduce need-based financial aid eligibility. Previously, these distributions were treated as untaxed student income, potentially cutting a student's aid by up to 50%. This new rule makes grandparent-owned 529s a much more effective way to save for college without hurting a grandchild's financial aid prospects, allowing more funds to go toward education and less toward debt.
Specifically, grandparents often raise their grandchildren due to a combination of parental substance abuse, abuse and neglect, unemployment, incarceration, HIV/AIDS, mental or physical illness, teenage pregnancy, child disability, divorce, military deployment, abandonment, and death.
How much can grandparents contribute to a 529 plan? A grandparent can give an individual contribution of up to $19,000 a year per beneficiary in 2025. A married couple filing jointly can contribute $38,000 in 2025.
Perhaps the simplest way to leave an inheritance to your grandchildren is to name them as beneficiaries in your will or trust to receive a specific amount of money or a percentage of your total accounts and property.
A 529 plan is generally better for long-term college savings due to significant tax advantages and potential for higher investment growth, while a High-Yield Savings Account (HYSA) offers liquidity and safety for shorter-term goals, as its variable rates can fluctuate but offer easy access without penalties, making it better for emergencies or near-term education expenses where penalties and taxes on earnings might apply with a 529. Choose a 529 for maximizing college funds and an HYSA for flexibility and safety.
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is sometimes called the '6-year rule'. You can choose when to stop the period covered by your choice.
Generally, from a tax perspective, it is more advantageous to inherit a home rather than receive it as a gift before the owner's death.
In summary, while giving with a cold hand allows for tax benefits, control, and security during your lifetime, it means you won't see the positive impact on your heirs and could lead to less impactful timing of the inheritance.
The "27.39 rule" (often rounded to $27.40) is a simple financial strategy to save $10,000 in one year by consistently setting aside $27.40 every single day, making it an achievable micro-saving habit to build wealth or an emergency fund. It turns the daunting goal of saving $10,000 into a manageable daily action, emphasizing consistency over large lump sums.