How Grandparents Can Leave Money to Grandchildren

Grandparents have five practical ways to leave money to grandchildren: annual cash gifts, direct payments for tuition or medical bills, trusts, beneficiary designations on financial accounts, and bequests in a will. Each carries different tax consequences and a different level of control over how the money gets used. Two 2026 numbers shape nearly every decision: the annual gift tax exclusion is $19,000 per recipient, and the lifetime estate and gift tax exemption is $15 million per person.¹

Annual Cash Gifts

You can give up to $19,000 per grandchild in 2026 without filing a gift tax return and without touching your lifetime exemption.¹ If you’re married, you and your spouse can elect to split gifts and double the tax-free amount to $38,000 per grandchild per year.² Both spouses must consent to splitting on a gift tax return for that year, and the election applies to every gift either spouse made during the calendar year.

Go above $19,000 to any one grandchild in a year and you’ll need to file IRS Form 709.³ Filing doesn’t mean you owe tax. It tracks how much of your $15 million lifetime exemption you’ve used. No gift tax comes due until your cumulative gifts above the annual exclusion exceed that threshold, but each dollar you use reduces what’s sheltered from estate tax when you die.

Cash is simplest, but you can also gift stocks, real estate, or other property. Non-cash gifts have to be reported at fair market value on Form 709, and the IRS expects documentation. For real estate and closely held business interests, that usually means an independent appraisal.³

One trap when gifting income-producing investments to young grandchildren is the kiddie tax. For 2026, a child’s unearned income above $2,700 is taxed at the parent’s marginal rate, not the child’s.⁴ This applies to children under 19 and full-time students under 24. A grandchild who receives a portfolio throwing off $5,000 a year in dividends won’t get the tax savings you might expect.

Direct Payments for Tuition and Medical Bills

Paying a grandchild’s tuition or medical expenses directly to the provider is the most underused wealth-transfer tool available. These payments are fully excluded from gift tax, with no annual cap and no reduction of your lifetime exemption, as long as the check goes straight to the school or the healthcare provider rather than to the grandchild.⁵ You can pay $80,000 in tuition and still give the same grandchild $19,000 in cash the same year, all without gift tax consequences.

The tuition exclusion covers tuition only. Room, board, books, and supplies don’t qualify.⁵ The medical exclusion is broader and covers treatment, diagnosis, prevention, and health insurance premiums paid on someone’s behalf.⁶ Both rules are strict about the payment going directly to the provider. Reimbursing your grandchild after they’ve already paid doesn’t count.

529 Education Savings Plans

A 529 plan complements the direct tuition route. Contributions count as completed gifts for gift tax purposes, but earnings grow tax-free and qualified withdrawals aren’t taxed. Unlike the direct tuition exclusion, 529 withdrawals can cover room, board, and required supplies, which matters if your grandchild lives on campus.

You can also front-load up to five years of annual exclusions into a 529 in a single year — $95,000 per grandparent, or $190,000 for a married couple splitting gifts — and spread the contribution across five tax years on Form 709. Beginning with the 2024-2025 academic year, the simplified FAFSA no longer requires students to report distributions from grandparent-owned 529 plans, which previously could cut federal financial aid by up to half the withdrawal amount. Some private colleges using the CSS Profile may still factor in grandparent-owned 529 accounts for institutional aid, but the federal problem is gone.

If your grandchild doesn’t need all the money for school, the SECURE 2.0 Act created an exit. Up to $35,000 of unused 529 funds can be rolled into the beneficiary’s Roth IRA over their lifetime, subject to the annual Roth contribution limit of $7,500 for 2026. The 529 account has to have been open at least 15 years before any rollover is allowed, so opening an account at a grandchild’s birth builds in that runway.

Trusts for Grandchildren

Trusts give you the most control over when and how a grandchild receives money. You set the rules in the trust document, and a trustee carries them out. Distributions at age 25, only for education, in monthly installments, only after completing a degree — all of that is customizable.

The tax question is whether the trust is revocable or irrevocable. A revocable trust can be changed or cancelled at any time, which keeps the assets in your taxable estate. It’s useful for avoiding probate and organizing your affairs but doesn’t reduce estate taxes. An irrevocable trust removes assets from your estate permanently, which shrinks your taxable estate but means you give up control.¹ For grandparents whose estates approach or exceed the $15 million exemption, irrevocable trusts are the primary planning tool.

A spendthrift clause is standard. Because the trust itself owns the assets rather than the grandchild, creditors from lawsuits, divorces, or financial mistakes generally can’t reach the money while it sits in the trust. A grandchild who hits a rough stretch doesn’t lose the whole inheritance in one bad year.

The Generation-Skipping Transfer Tax

When you transfer wealth directly to grandchildren and skip your children’s generation, a separate federal tax can apply on top of the regular gift or estate tax. The generation-skipping transfer (GST) tax rate equals the maximum estate tax rate, currently 40%.⁷ Every individual also gets a GST exemption equal to the basic exclusion amount, which is $15 million for 2026.⁸ As long as your total generation-skipping transfers stay within that exemption, no GST tax is owed. Trusts are commonly structured specifically to allocate this exemption efficiently.

UTMA Custodial Accounts

For smaller amounts where a full trust feels like overkill, a custodial account under the Uniform Transfers to Minors Act is a streamlined option. An adult custodian manages the account until the grandchild reaches the transfer age set by state law, most commonly 21, though some states set it at 18 and a few allow extensions to 25 or beyond.

The trade-off is control. Once your grandchild hits that age, the money is theirs outright with no restrictions and no conditions. A 21-year-old with sudden access to a large custodial account doesn’t always handle it the way a grandparent envisioned. If that worries you, a trust with specific distribution terms and a spendthrift clause is the better vehicle despite the higher setup cost.

Beneficiary Designations on Accounts

Bank accounts, brokerage accounts, life insurance policies, and retirement accounts all let you name a grandchild as beneficiary. Bank accounts use “payable on death” designations; investment accounts use “transfer on death” forms. These designations are binding contracts with the financial institution and override your will. The institution pays the named beneficiary directly on proof of death, skipping probate entirely.

Updating a beneficiary is straightforward: contact the institution and complete a new form with your grandchild’s name, Social Security number, and address. Review designations after births, deaths, marriages, and divorces in the family. Outdated forms are one of the most common estate planning failures, and they’re nearly impossible to fix after death because the institution is legally obligated to follow whatever form is on file.

One caution trips up many grandparents: naming a minor directly as beneficiary on a life insurance policy or retirement account creates problems. Most insurers and plan administrators won’t pay benefits directly to a minor. If the payout exceeds a modest threshold, the funds may be held until a court appoints a guardian to manage the money, adding delay, legal costs, and court oversight that defeat the point of avoiding probate. Name a trust as the beneficiary, or set up a custodial arrangement, and the issue goes away.

Bequests in a Will

A will is the most familiar way to leave money to grandchildren. A specific bequest names a dollar amount or particular asset, such as “$50,000 to my granddaughter, Jane Elizabeth Smith.” A residuary bequest gives the grandchild a percentage of what remains after debts, taxes, and specific bequests are paid. Residuary bequests are more flexible because they adjust automatically to the estate’s final value.

Use full legal names and describe the relationship clearly. Ambiguous language is where estate disputes start, and contested wills can tie up assets for years. An executor who can’t figure out which “Jane” the testator meant has no good options.

Your will should also spell out what happens to a grandchild’s share if that grandchild dies before you do. “Per stirpes” sends the share down to the deceased beneficiary’s own children, meaning your great-grandchildren. “Per capita” divides the estate equally among surviving beneficiaries only, with nothing flowing to the deceased person’s branch. State defaults vary, so putting your preference in writing eliminates guesswork and family conflict.

Everything passing through a will goes through probate, a court-supervised process that validates the will, pays debts and taxes, and distributes what’s left. Timelines run from several months to two years depending on complexity, and filing fees plus attorney fees take a bite. That’s why many grandparents use beneficiary designations and trusts alongside a will rather than relying on the will alone.

Gift Now or Leave at Death: The Cost Basis Difference

This is where grandparents unknowingly cost their grandchildren real money. Give an appreciated asset during your lifetime — stock, real estate, a business interest — and the recipient takes over your original cost basis, meaning whatever you paid for it.⁹ If the same asset is inherited after your death, the basis resets to fair market value on the date of death.¹⁰

Say you bought stock for $10,000 thirty years ago and it’s now worth $200,000. Gift it to your grandchild during your lifetime, and they inherit your $10,000 basis. Sell at $200,000 and they owe capital gains tax on $190,000. If instead the stock passes to them after your death, the basis steps up to $200,000. They can sell immediately and owe zero capital gains tax.

The planning rule follows: for highly appreciated assets, leaving them through a will or trust is almost always more tax-efficient than gifting during your lifetime. Use your annual exclusion and lifetime gifts for cash or for assets that haven’t gained much value. Save the appreciated stock and real estate for the inheritance, where the stepped-up basis wipes out decades of embedded gains.

Gifts and Medicaid Eligibility

If long-term care might be in your future, gifting assets to grandchildren can backfire. Medicaid applies a five-year look-back period when you apply for nursing home or home care benefits. Any gifts made inside that window, regardless of size, can trigger a penalty period during which you’re ineligible for Medicaid coverage.

The IRS gift tax exclusion doesn’t protect you here. Giving $19,000 to a grandchild is fine for tax purposes but still counts as a disqualifying transfer under Medicaid rules. The penalty period is calculated by dividing total gifts by the average monthly cost of nursing home care in your state, and there’s no cap on how long it can last. Grandparents who make generous gifts in their early seventies and then need nursing home care at seventy-eight sometimes find themselves with no Medicaid coverage and depleted assets.

If long-term care is even a possibility, talk to an elder law attorney before making substantial gifts. Gifts made more than five years before a Medicaid application generally fall outside the look-back window, so timing matters. An irrevocable trust funded well in advance of any anticipated need is one common approach, but the planning has to happen years before it’s needed, not months.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 2513 – Gift by Husband or Wife to Third Party
3
Internal Revenue Service. Instructions for Form 709
4
Internal Revenue Service. Topic No. 553 – Tax on a Child’s Investment and Other Unearned Income
5
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts – Section: Exclusion for Certain Transfers for Educational Expenses or Medical Expenses
6
eCFR. 26 CFR 25.2503-6 – Exclusion for Certain Qualified Transfer for Tuition or Medical Expenses
7
Office of the Law Revision Counsel. 26 USC 2641 – Applicable Rate
8
Office of the Law Revision Counsel. 26 USC 2631 – GST Exemption
9
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
10
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent