21 Feb I want to gift I Bonds to my grandchildren. How?

Q. I wish to give each of my brand new twin grandchildren a $10,000 I Bonds through TreasuryDirect. I need to avoid the $17,000 gift tax cap per person per year so I can’t give $20,000 to my daughter to hold for my grandchildren. I understand my daughter, the mother, needs to set up her TreasuryDirect account and accounts for the kids, and then link them to her account. I understand that the bonds should not be in the grandchild’s name to avoid FAFSA funding penalties. How can I do this?
— Grandma

A. Congratulations on the arrival of your grandchildren.

It’s wonderful that you’d like to make a gift to them while keeping future financial aid qualifications in mind.

There are many ways that grandparents can gift financial assets, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

As you point out, assets can impact the application for financial aid, commonly known as the FAFSA.

Mott said there are changes going into effect for the 2023-2024 school year that are important for you to know.

“In the past, the use of assets owned by grandparents, aunts, uncles and other non-parent custodians were counted as income for the student,” Mott said. “The new application will no longer count these assets which opens the door for relatives to fund 529 college savings accounts without jeopardizing financial aid qualifications.”

However, there has been no change to the way the assets in a student’s name or held by a parent will be treated, she said.

In general, the assets that are held by a student such as bank and investment accounts will have a greater impact on the calculation of the Expected Family Contribution (EFC) than those held by parents or others, Mott said.

“A student asset will increase the EFC by 20% of the account’s value, while the percentage for parent assets is no more than 5.64%,” she said.

A Uniform Gift to Minor’s Account (UGMA/UTMA) is a custodial account that is created for the benefit of a child under the age of 18. It will be considered an asset of the student, she said. On the other hand, 529 college savings accounts which are owned by a parent with the child as a beneficiary are subject to the 5.64% maximum, she said.

As you mention, the maximum that an individual can gift another person is $17,000 for 2023 — without having to report the transaction to the IRS.

Mott said while you may not be able to pass the full $34,000 for your grandchildren directly to your daughter, those funds could go to your grandchildren by way of a UGMA account. However, as mentioned previously, these would be considered a student asset when it comes time to filing the financial aid application, she said.

When it comes to purchasing I Bonds, you could purchase the bonds on behalf of the child and maintain them in your own account, Mott said. At the time the bond matures, you could gift the money.

But you’d be limited to one $10,000 purchase per year, so it would take two years for you to reach your goal for your two grandchildren, assuming you’re not married. If you were, you and your spouse could each make the purchase.

“This would keep the assets out of their name and you would have to report the interest income and pay any taxes due at the time,” Mott said. “As these bonds mature in 30 years, this may be a longer time horizon than you have in mind, but they can be cashed in after 12 months.”

The other option will require that a TreasuryDirect account be set up in the child’s name with their Social Security number and linked to a parent’s account, as you noted. This account would be considered their asset for financial aid purposes, Mott said.

“Another option to consider, if you are intending that the $10,000 be used for higher education, is to set up a 529 college savings plan for each of your grandchildren,” she said. “These accounts allow for tax-free growth of the assets, but the funds must be used for qualified education expenses.”

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This story was originally published on Feb. 21, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.