Grandparenting has perks. You get to love on the kids, they adore you, and then they go home. But for all the glory of grandparenting, it can be a time when some make major financial missteps.
Here’s a mini guide to grandparenting mistakes to avoid.
Gifting highly appreciated assets
Say the grandparents bought a vacation home for $50,000. They give it to the grandchildren when the value is $500,000. The grandchildren have a "cost basis" in the home equal to that of the grandparents, $50,000. When they sell the home, they will pay capital-gains tax on $450,000 of gain. If the grandparents died when the value was $500,000, the beneficiaries would receive a step-up in cost basis to the fair market value at the time of their death, $500,000.
“Consider what is being gifted and determine whether the step-up in cost basis is significant,” says Neel Shah, a financial adviser with Beacon Wealth Solutions in Monroe, New Jersey.
Spoiling your grandchildren
No doubt it feels good to dote on the grandkids and buy lavish gifts, but is this good for your finances and will your grandkids feel entitled? “Save presents for birthdays and holidays. Create memories together instead of throwing money at them. Be more than an ATM,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.
Not making your final wishes known
Without a will, not only will the state decide what happens to your belongings, your grandchildren may not receive what you intended for them, like money for college. Says Zimmelman, “Your heirs will go through red tape and possibly end up fighting.”