You Are a Grandparent. Now what?

The excitement in the client's voice was palpable. He and his wife were to become grandparents for the first time.

  Lois Wyse, author of Funny, You Don't Look Like a Grandmother, observed, "Grandchildren are the dots that connect the lines from generation to generation." There is a somewhat indescribable satisfaction in seeing a son or daughter grow up and extend the lineage chain, the next chapter in the family history.

As financial advisors, after we get the joyous news, the next question often involves establishing college savings accounts. The most popular vehicle is a 529 College Savings Plan offered by all 50 states. You may select one from your own state (there may be some tax advantages) or you can buy one from another state if you like that plan's investment options better.

 Money placed in a 529 Plan is a gift made with after-tax money. The advantage is that the money grows free of income tax if used for qualified education expenses. Every person may gift up to $14,000 in 2013 on behalf of a child. Couples may make joint gifts of up to $28,000. Wealthy grandparents who may be trying to move money out of a taxable estate may make 5 years of gifts up front, or $70,000 per person per child or $140,000 jointly. Grandparents may control the account if they wish, but in the event of their death before the account is used, ownership may pass to the mom or dad.

 Another, but limited option, is a Coverdell Education Savings Account (ESA). Similar to a 529 Plan, ESAs are a potentially tax-free way to save for college. But unlike a 529 plan that may only be used for higher education, ESAs also may be used for qualifying K-12 education. If you think private K-12 education is in the cards, an ESA may be an option.

 One limit is that only $2,000 a year may be contributed to a child's account from all sources. Also, in most cases only the parents can control a ESA, not the grandparents. If that's okay, one could gift the son or daughter the money and the parent could fund the ESA.

  A Uniform Gift to Minors Act (UMGA) allows a minor to own securities (such as a mutual fund) without having to set up a trust through a lawyer. The Uniform Transfer to Minors Act (UTMA) is similar, but it permits a minor to own other types of property such as real estate, royalty interests, patents, or transfers via an inheritance. These accounts are governed by state law and one potential downside is that control of  the property shifts to the minor at age of majority, usually age 18. We love the little darlins' but we know that some 18 year olds are not yet mature, or have issues, rendering them ill suited to manage property, especially if the amounts become significant.

 Trusts that transcend the age of majority require a sharp attorney and financial advisor well-versed in tax and other implications. With increased longevity, some grandparents may want to skip over their children who may be doing fine in their own right, and endow grandchildren or even great-grandchildren. Again, well-thought-out trust planning many be called for. If you wish to leave a minor assets in a qualified retirement plan such as an IRA, special planning is needed. There are complications if you make the minor a beneficiary by name.

 For some reason, the incidence of children with special needs is on the rise. Autism, cerebral palsy, epilepsy, Down syndrome, learning difficulties, and other challenges can strain family fabrics and budgets, increasing the need for funding. Down syndrome children, for example, now have an average life span of 55 years. Life insurance contracts, including Last Survivor or Second-to-Die policies may be efficient devices to fund Special Needs Trusts.

  The fun will come with grandparents joining their children and grandchildren at the beach, adventure trips, Disney cruises, Club Med, and get-togethers for holidays and special events. May the circle be unbroken!

 Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com