Gifts to the Grandkids: Key Planning Considerations

What’s in this article?

• State tax considerations for Oregon and Washington residents
• Taking advantage of the annual and lifetime gift tax exclusion
• Making direct payments for education and healthcare
• Gifting to 529 Plans
• Using custodial accounts and trust structures as a tool for gifting to grandkids

Many of the grandparents that I work with derive a great deal of joy from supporting younger generations—funding education, helping with a first home, or simply providing a financial foundation for a family member’s future. For families with estates valued in the millions, thoughtful gifting can also play a critical role in estate tax reduction and multigenerational planning.

This article outlines key issues for one specific class of gifting: grandparents making gifts to grandchildren. We’ll discuss annual exclusion gifts, lifetime exemption use, direct education and medical payments, 529 plans, trust structures, and the important state-level estate tax considerations for residents of Oregon and Washington.

The Federal and State Transfer-Tax Systems and Lifetime Exemption

For federal tax purposes, lifetime gifts and transfers at death are tied together through a single exemption called the federal estate and gift tax exemption. The federal exemption is currently $13.99 million per person and is scheduled to go up to $15 million in 2026. The federal estate tax rate on amounts above the exemption is 40%. This high tax rate creates a strong incentive for many grandparents to reduce the size of their taxable estates during their lifetimes.

For families living in Oregon and Washington, state-level estate taxation must also be considered. Both states have their own estate tax systems with much lower exemption amounts than the federal level:

• Oregon imposes an estate tax with an exemption of$1 million, one of the lowest thresholds in the country. Assets above that amount may be taxed at graduated rates that reach up to 16%.
• Washington has a higher exemption than Oregon—$3 million, adjusted periodically for inflation—and a top estate tax rate of 35%.

Neither Oregon nor Washington impose a gift tax. This means Oregon and Washington residents can reduce their estates significantly through lifetime gifting. Because both states have comparatively low estate tax thresholds, gifting can play a meaningful role in reducing future tax liability. There is some fine print around these state-level gifts, so it is best to consult an attorney before initiating your gifting plan.

The Annual Gift Tax Exclusion

I expect many of our readers are familiar with the annual federal gift tax exclusion, which is the amount an individual may gift another person without dipping into their lifetime exemption or filing a federal gift tax return. The gift tax exclusion amount is scheduled to remain at $19,000 in 2026, but the IRS adjusts it periodically for inflation. Annual exclusion gifts can remove substantial value from the estate over time if implemented consistently. If grandparents wish to make exclusion-level gifts to each grandchild, they can pair gifts with their spouses and effectively double the amount each year per grandchild. Gifts exceeding the annual exclusion use part of the donor’s federal lifetime estate and gift tax exemption.

Annual exclusion gifts are straightforward, but strategic implementation can multiply their impact and/or keep some guardrails around the gifted asset. Gifts to minors raise substantial questions given the young age of the recipients. These gifts can be made outright, but come with material risks: lack of control, potential mismanagement, and premature access to funds.

Custodial Accounts for Gifting

Grandparents often prefer to use vehicles that impose oversight, such as custodial accounts or trusts. A custodial account (UTMA or UGMA account) allows a grandparent to gift assets for the benefit of a minor while maintaining control of investments and distributions until the minor reaches the age of majority (18 or 21 depending on the state). These accounts are simple to establish and can hold a variety of assets. There are two main challenges presented by these accounts: assets often count as the grandchild’s for college-aid calculations, and these custodial accounts offer no long-term protection from creditors (or from the grandkids’ own spending impulses).

529 College Savings Plans

A 529 college savings plan is another common way grandparents make exclusionary gifts to subsequent generations. These accounts are some of the most powerful, flexible, and tax-efficient ways to help with education expenses. The key benefit of 529 plans is that earnings grow tax-free and distributions for qualified education are tax-free. For grandparents, there may be added tax benefits as contributions qualify for the annual exclusion and a special “super-funding” rule allows up to five years’ worth of annual exclusion gifts to be contributed at once. The account owner (often the grandparent) retains control over distributions. There are a variety of state-specific tax benefits involved with 529 plans and financial aid applications treat 529 assets differently when owned by a grandparent, so it is best to talk with your Coldstream advisor if you are considering gifting to a 529 plan.

Direct payments for education and healthcare

One often-overlooked strategy is making direct payments for a grandchild’s tuition or medical expenses. These payments do not count against the annual exclusion or lifetime exemption, making them one of the most powerful tax-free transfer options available. These payments must be made directly to the educational institution or medical provider, as payments made to the grandchild or his or her parent (for reimbursement) do not qualify. These direct gifts are an effective way to support educational endeavors and to remove large amounts from their estate without any gift tax impact.

Trusts

For families aiming to transfer millions of dollars during their lifetime, trusts offer far more control and protection than outright gifts or the educational tools discussed above. Trusts may allow grandparents to control when and how grandchildren receive assets, protect trust assets from divorce or creditors, and customize distributions for education, home purchases, business ventures, or other needs.

The most common trusts in wealth-transfer planning for grandchildren are irrevocable trusts, many of which are referred to as “family gift trusts” or “descendants’ trusts.” These trusts are funded during the grandparent’s lifetime and can hold assets for multiple grandchildren and future descendants. Many grandparents prefer a single trust for all descendants to simplify management and promote fairness. Wealthy families must also consider the Generation-Skipping Transfer (GST) tax—a separate federal tax designed to prevent families from skipping a generation when gifting to avoid estate taxes. A GST-exempt trust can pass assets free of estate and GST tax for multiple generations when structured properly, making it one of the most powerful multigenerational wealth-planning tools available.

Often, gift trusts for grandchildren are structured as “grantor trusts,” meaning the grandparent pays the income tax on trust earnings. While this may seem counterintuitive, it is a powerful planning strategy, as the trust grows faster because trust assets are not depleted by taxes, and the grandparents continue to reduce their own taxable estate through the payment of the trust’s taxes.

Conclusion

Gifting to grandchildren offers a powerful combination of personal satisfaction and strategic estate tax reduction. The key is understanding the tools available, from annual exclusion gifts and 529 plans to GST-exempt trusts. Families in Oregon and Washington must additionally navigate the complexities of state estate tax systems, which often make lifetime gifting even more advantageous.

Using your exclusionary gifts and your exemption strategically can help transfer appreciating assets tax-efficiently, as assets removed from the estate today avoid estate tax not only on their current value but also on future growth. The challenge is that giving away assets removes them from your control and, in some cases, carries tax tradeoffs.

Ultimately, the most successful gifting plans are those tailored to a family’s values, goals, and multigenerational vision. With thoughtful planning and the right professional support, grandparents can create a lasting impact—helping grandchildren thrive while preserving and protecting family wealth for years to come.

*Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®. CERTIFIED FINANCIAL PLANNER™ and CFP^® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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