How to Leave Money to Grandchildren: Gifts, 529s, and Trusts

To leave money to grandchildren, you can use annual cash gifts of up to $19,000 per grandchild in 2026, direct payments to their school or medical provider, 529 education savings plans, custodial accounts, trusts, or a will with beneficiary designations on your financial accounts. Each path has its own tax treatment, and some can also affect your Medicaid eligibility if you later need long-term care. The lifetime federal gift and estate tax exemption sits at $15,000,000 per person in 2026, so most families will never owe federal gift or estate tax, but reporting rules and generation-skipping transfer tax still apply.¹

Annual Cash Gifts Up to $19,000

The simplest method is a direct gift. Federal law lets you give up to $19,000 per person per year without owing gift tax or filing a gift tax return.² The limit is per recipient. Four grandchildren means up to $76,000 out the door in a single year with no tax consequences. If you are married, both spouses can agree to “split” gifts and treat each transfer as if half came from each of you, doubling the annual amount to $38,000 per grandchild.³

Cash is easiest: a check, wire, or deposit into an account held for the grandchild. You can also transfer securities by instructing your brokerage to move shares. If the grandchild is a minor, the gift usually goes to a custodial parent or legal guardian who manages it until the child reaches legal age. Keep written records of every transfer so you can track cumulative amounts and prove compliance if the IRS asks later.

One catch with gift splitting: if you and your spouse elect to split gifts, both of you generally must file Form 709 for that year even if only one of you wrote the check. Narrow exceptions apply when all gifts were under $38,000 per recipient and were present-interest gifts, in which case only the donor spouse files.⁴

Paying Tuition or Medical Bills Directly

One of the most underused tools is the unlimited exclusion for direct payments of tuition or medical expenses. Write a check directly to your grandchild’s school for tuition, or to a hospital or doctor for their medical care, and the payment is completely exempt from gift tax with no dollar cap.³ This exclusion sits on top of the $19,000 annual exclusion. You could pay $50,000 in tuition directly to a university and still give the same grandchild another $19,000 in cash that year, all tax-free.

The rules on where the money goes are strict. For tuition, you must pay the educational institution directly, and the exclusion covers tuition only, not room and board, books, or supplies.⁵ For medical expenses, you must pay the provider or insurance company directly. If you reimburse the grandchild after they have already paid, or if their insurance later reimburses the expense, the exclusion does not apply. Qualifying schools range from elementary schools to universities, provided they maintain a regular curriculum and student body. Medical expenses follow the same broad definition used for the medical expense tax deduction, including diagnosis, treatment, and health insurance premiums.

529 Education Savings Plans

A 529 plan lets you contribute after-tax money that grows tax-free and comes out tax-free when used for qualified education expenses like tuition, fees, books, supplies, and room and board.⁶ You name the beneficiary (your grandchild), choose investments, and keep control of the account, including the ability to change the beneficiary to another family member. Many states also offer a state income tax deduction or credit for contributions.

Contributions count as completed gifts, so the $19,000 annual exclusion applies. But 529 plans offer a special accelerated option no other vehicle matches. You can contribute up to $95,000 at once, or $190,000 as a married couple, and elect to spread the gift over five tax years for gift tax purposes. This is sometimes called superfunding. You make the election on Form 709, and the IRS treats one-fifth of the contribution as a gift in each of the five years. If you die during the five-year window, only the portion not yet allocated gets pulled back into your estate. The election uses up your full annual exclusion for that beneficiary during the five-year period, so any extra gifts to the same grandchild in those years count against your lifetime exemption.⁴

Rolling Leftover 529 Funds Into a Roth IRA

Starting in 2024, leftover 529 money can be rolled into a Roth IRA in the beneficiary’s name under SECURE 2.0. The lifetime cap is $35,000 per beneficiary, and each year’s rollover cannot exceed the Roth IRA contribution limit for that year, which is $7,500 in 2026 for someone under age 50.⁷ Requirements trip people up: the 529 account must have been open at least 15 years, contributions made within the most recent five years cannot be rolled over, and the beneficiary must have earned income at least equal to the rollover amount that year. The 15-year seasoning rule rewards early planning.

Custodial Accounts and the Kiddie Tax

Custodial accounts set up under the Uniform Transfers to Minors Act (UTMA) or the older Uniform Gifts to Minors Act (UGMA) hold investments, cash, and other assets in a grandchild’s name with an adult custodian managing them. Unlike a 529, there is no restriction on how the money is eventually used. The trade-off: the gift is irrevocable the moment you make it, and once the grandchild reaches the age set by state law (typically 18 or 21), control passes to them automatically. You cannot take it back, and you cannot delay the handover. Plenty of grandparents have watched an 18-year-old inherit a six-figure custodial account and spend it in ways that were not part of the plan.

Then there is the kiddie tax. When a minor, or a full-time student under 24 who does not provide more than half their own support, earns investment income from a custodial account, the first portion is tax-free, the next portion is taxed at the child’s own rate, and anything above $2,700 in 2026 is taxed at the parent’s rate.⁸ If the parent is in a high bracket, the tax on dividends and capital gains inside the account can be substantial. For large gifts, a 529 plan or a trust often makes more sense.

Trusts for Grandchildren

Trusts give you far more control than any other method. You set the terms: when distributions happen, what the money can be used for, and who manages it. A grandchild who would otherwise receive a lump sum at 18 from a custodial account can instead receive trust distributions at ages you choose, such as 25 for education, 30 for a home purchase, and 35 for unrestricted access.

Revocable, Irrevocable, and Testamentary

A revocable living trust is one you create during your lifetime and can change or cancel at any time. It avoids probate and keeps your estate plan private, but the assets remain part of your taxable estate because you never gave up control. An irrevocable trust permanently removes assets from your estate once funded. That is a real tax advantage for large estates, but you cannot take the assets back or change the terms without the beneficiaries’ consent, or a court order in limited circumstances. A testamentary trust is written into your will and does not exist until you die; the assets pass through probate first, then fund the trust.

Crummey Withdrawal Rights

Trusts get tricky with gift taxes. The $19,000 annual exclusion applies only to gifts of a “present interest,” meaning the recipient can use or benefit from the gift right away.³ Money locked in an irrevocable trust the grandchild cannot touch for years does not obviously qualify. The standard workaround is a Crummey withdrawal right. Each time you contribute to the trust, the beneficiary gets a written notice that they have the right to withdraw the contributed amount (up to the annual exclusion) for a limited window, usually 30 to 60 days. If the beneficiary lets the window lapse, the money stays in the trust under whatever restrictions you have set.

For this to work, the IRS requires that each beneficiary receive actual notice of every contribution and have a genuine opportunity to withdraw. The notice is typically a formal letter stating the gift amount, the withdrawal period, and instructions for exercising the right. Skipping the notice or using a blanket waiver of future notices will cause the IRS to treat the gift as a future interest, disqualifying it from the annual exclusion. The trustee needs to send these letters consistently, every single time.

Wills and Beneficiary Designations

A will is the most familiar way to leave money to grandchildren after your death. You name the grandchild as a beneficiary, specify the amount or percentage, and optionally direct the inheritance into a testamentary trust. Every state has its own execution requirements, but most require you to sign the will in the presence of at least two witnesses who also sign the document. Rules differ enough that working with an attorney in your state is the safest approach.

For bank accounts, brokerage accounts, retirement accounts, and life insurance policies, beneficiary designations control who receives the assets at death. These designations override whatever your will says. If your will leaves everything to your grandchildren equally but your IRA beneficiary form still names your adult child, your adult child gets the IRA. This is where most estate plans fall apart in practice. Review every beneficiary designation form at every financial institution where you hold assets, and update them whenever family circumstances change.

Transfer-on-death (TOD) and payable-on-death (POD) designations work the same way for brokerage and bank accounts. You fill out a form with the institution naming your grandchild, and at your death the assets transfer directly without going through probate. For minor grandchildren, some institutions require you to name an adult custodian to receive the funds on the child’s behalf.

The Lifetime Exemption and Generation-Skipping Transfer Tax

If your gifts to a grandchild exceed the $19,000 annual exclusion in a year, the excess does not automatically trigger tax. It counts against your lifetime gift and estate tax exemption, which is $15,000,000 per person in 2026.¹ You report the excess on Form 709, and the IRS deducts it from your remaining exemption. No actual tax is due until your cumulative lifetime gifts plus your estate at death exceed that amount. For married couples, that is effectively $30,000,000 combined.

Transfers to grandchildren carry an additional layer that transfers to your own children do not: the generation-skipping transfer (GST) tax. Because grandchildren are two or more generations below you, the IRS treats direct transfers to them as skipping the middle generation and imposes a separate tax designed to prevent families from avoiding estate tax at each generational level.⁹ The GST rate equals the maximum federal estate tax rate, currently 40%.¹⁰ That 40% applies on top of any gift or estate tax.

You also get a GST exemption of $15,000,000 in 2026, which matches the lifetime gift and estate tax exemption.¹ Gifts within the annual exclusion do not use up GST exemption. Larger transfers, whether outright or into trusts for grandchildren, require you to allocate GST exemption on Form 709 to shield them from the 40% tax. Failing to allocate it properly is an expensive mistake an estate planning attorney can prevent.

How Gifts Can Affect Medicaid Eligibility

This is the issue that blindsides the most people. If you ever need long-term care through Medicaid, the program looks back at every asset transfer you made during the 60 months before your application.¹¹ Any gift made for less than fair market value during that window, including cash gifts to grandchildren that were perfectly legal for gift tax purposes, triggers a penalty period during which Medicaid will not cover your nursing home or long-term care costs.

The penalty is calculated by dividing the total uncompensated transfer amount by the average monthly cost of nursing home care in your state. Give away $100,000, and in a state where the average monthly cost is $10,000, you face a 10-month penalty during which you must pay for your own care. The IRS gift tax exclusion has no bearing here. A $19,000 gift that is fine with the IRS still counts as a penalizable transfer under Medicaid’s look-back if made within five years of applying.

Limited exceptions exist. Transfers to a spouse, to a permanently disabled child of any age, or in certain cases to a trust for a disabled beneficiary do not trigger penalties. Standard gifts to healthy grandchildren get no exception. If you are in your 70s or older and there is any chance you might need long-term care within five years, consult an elder law attorney before making significant gifts.

Filing Requirements for Gift Tax Returns

You must file IRS Form 709 for any year in which your gifts to a single person exceed $19,000, you and your spouse elect to split gifts, or you make a 529 contribution using the five-year averaging election.⁴ The return is due by April 15 of the year following the gift, with the same weekend and holiday adjustments that apply to income tax returns. An extension of your income tax return automatically covers Form 709.¹²

Gifts that qualify for the unlimited tuition or medical exclusion do not count toward the $19,000 threshold and do not need to be reported. Direct payments to schools and medical providers are invisible to the gift tax system, one more reason that method is so attractive.

For every transfer you make, keep records showing the date, amount, recipient’s full legal name, Social Security number, and a description of any non-cash asset. For securities, keep brokerage confirmations showing the shares transferred and their value on the transfer date. These records protect you if the IRS questions a return, and they help your executor reconstruct your gift history when settling your estate.

1
Internal Revenue Service. Whats New – Estate and Gift Tax
2
Internal Revenue Service. Tax Inflation Adjustments for Tax Year 2026
3
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
4
Internal Revenue Service. Instructions for Form 709 (2025)
5
eCFR. 26 CFR 25.2503-6 – Exclusion for Certain Qualified Transfers for Tuition or Medical Expenses
6
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
7
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
8
Internal Revenue Service. Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income
9
Office of the Law Revision Counsel. 26 USC 2613 – Skip Person and Non-Skip Person Defined
10
Office of the Law Revision Counsel. 26 USC 2641 – Applicable Rate
11
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
12
Internal Revenue Service. About Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return