Funding Your Grandchild’s Graduation Gift: Tax-Smart Gifting Strategies

Many successful grandparents find great joy in helping their grandchildren succeed and grow into confident young adults. Graduation is one of those proud milestones—whether from high school, college, or grad school—marking the start of something big. These moments shape the future and create memories that last a lifetime for the student and the entire family.

At BGM, clients often ask how they can best support their grandchildren during these life-changing steps. The good news is you have several smart and strategic ways to do it.

Gifting to your grandchildren isn’t just about transferring wealth—it’s about transferring values and creating opportunities. Here are some tax-smart ways to fund a graduation gift that’s both meaningful and financially sound.

The Annual Gift Tax Exclusion

One of the easiest ways to give to your grandchild without any tax consequences is by using the annual gift tax exclusion. In 2025, that limit is $19,000 per person. If you’re married, you and your spouse can each give $19,000, allowing a total of $38,000 per grandchild per year.

This method allows you to give generously without reducing your lifetime exemption or needing to file a gift tax return. You can gift in the form of cash or even securities.

BGM Insight: We see a lot of our clients using this method to give substantial graduation gifts. We help them plan for these gifts and include them in their financial strategy to make sure everything stays on track and within their goals.

529 Education Savings Accounts & Strategy

A 529 plan can be a great tool if your grandchild is heading to college. It’s designed for education savings and comes with powerful tax benefits. The money grows tax-deferred, and if it’s used for qualified education expenses—like tuition, books, fees, and sometimes even room and board — withdrawals are tax-free at the federal level. State tax rules may vary.

You can also use the annual gift tax exclusion when contributing to a 529 plan. A lesser-known but useful rule allows you to front-load five years of contributions in one year—up to $95,000 per person or $190,000 per couple, depending on the current limits and eligibility. This can be a great way to make a large impact upfront, though it does come with some reporting rules and requirements.

BGM Insight: We typically encourage clients to contribute to 529 accounts sooner rather than later to take full advantage of tax-deferred growth. However, even late-stage contributions can still offer great value, especially if you utilize the five-year front-loading rule. We’re here to help see if it fits your overall plan and guide you through the process.

Gifting Appreciated Assets: Income Tax Benefits for Both Sides

Many of our clients own appreciated stocks or mutual funds that have grown significantly over time. Gifting these assets instead of cash can come with a nice tax advantage.

When you gift appreciated investments, you don’t have to pay the capital gains tax, and if your grandchild is in a lower tax bracket, they may be able to sell the investment and pay little to no tax themselves, especially if they qualify for the 0% long-term capital gains tax bracket.

We’ve also seen clients use this strategy to teach their grandchildren about investing and financial responsibility. It’s not just a gift of money—it’s a gift of knowledge.

Funding a Trust Account

If you’re thinking of a larger gift or want to maintain some control over how it’s used, a trust might be the right approach. A trust allows you to set rules around how and when the funds can be used, which can help protect the gift and ensure it’s used wisely. It’s also a good estate planning tool that may reduce your future estate tax exposure. Considerations include:

• Irrevocable Trusts: A Crummey trust, for example, can qualify for annual gift tax exclusion and allow you to control distributions to your grandchild over time.
• Generation-Skipping Transfer Tax (GSTT): When gifting to grandchildren, you also need to be aware of the GSTT. This tax is meant to prevent skipping a generation when transferring wealth. With proper planning, we can help you minimize or avoid this tax altogether.

BGM Insight: If you’re thinking about setting up a trust for your grandchild, we can walk you through structuring it so it meets your goals, works with your estate plan, and takes advantage of current tax laws.

Our Planning Approach at BGM

From my experience working with clients and their families, I’ve found that planning ahead helps clients feel more comfortable and confident with gifting. There are a few main areas we focus on when preparing for a graduation gift:

• Tax Implications: We look at your tax situation and which gifting strategies will be the most efficient.
• Your Financial Needs: We help make sure any gift fits into your broader retirement plan and doesn’t put stress on your finances.
• Your Estate Plan: We assess how gifting fits into your long-term estate planning and legacy goals.
• Your Grandchild’s Circumstances: We consider what the grandchild needs. For example, a 529 plan makes sense if they’re going to college, but other strategies may be more flexible for a grandchild going a different route, such as starting a business.

Proactive Planning Pays Off

The earlier you start planning for gifting, the more strategic we can be. Whether you’re giving $5,000 or $50,000, we want to make sure it’s done in the most tax-efficient way and aligns with your financial goals.

If you’re thinking about giving a graduation gift this year, now is a great time to reach out and start the conversation. Several options are available, and we’ll help you find the one that works best for your family.

More Than Just a Financial Gift

While a monetary gift is valuable, a personal touch can go a long way. A letter expressing your pride, sharing life advice, or offering encouragement can mean as much as the money itself. It makes the gift feel more memorable.

At BGM, we’re not just here to talk about numbers. We’re here to help you express your love and legacy in the most thoughtful way possible. If you’re considering gifting this year, give us a call. We’ll help make sure the process is smooth, strategic, and special, just like the moment you’re celebrating.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.