How Grandparents Can Help Build Wealth for a Newborn

A look at how 529 plans, UTMAs, trusts, Trump Accounts and brokerage accounts compare when planning for a grandchild.

Welcoming a first grandchild can inspire grandparents to start helping right away, especially if they have the means to do so.

Even experienced grandparents may find that the rules have changed since the last time they set money aside for a grandchild. Some may also be considering a Trump Account, a newly introduced option.

Below are five account types worth weighing, along with their advantages, drawbacks and possible tax effects.

1. 529 plans for education costs

For grandparents who want to support education, a 529 plan can be an appealing place to start.

Caleb Moyer, CFP, CFA, EA, and owner of Moyer Tax Services, says contributions are not deductible on the federal return, though some states offer tax benefits to the contributor. He adds that 529 investments grow tax-deferred and that withdrawals used for qualified education expenses are tax-free.

Moyer notes that 529 plans can provide meaningful flexibility for education savings.

“A grandparent can make a gift to the 529 for the child’s benefit but yet retain some control over the account, including the ability to change beneficiaries. The account owner, not the beneficiary, also typically controls when distributions are made.”

He also points out that, under the so-called grandparent loophole, the Free Application for Federal Student Aid, or FAFSA, does not count withdrawals from a grandparent-owned 529 as student income when financial aid is calculated. More than 200 private schools, including most Ivy League institutions, use the CSS Profile, which may take grandparent-held 529 plans into account.

Moyer adds that current rules also leave room if the child does not need all the education money, including the option to roll over a long-held 529 balance into the beneficiary’s Roth IRA.

That rollover is capped at $35,000 per beneficiary. A bipartisan Senate bill would remove the cap, which could give a grandchild more flexibility if they do not attend college or do not spend down the account. Still, the proposal may not become law.

Despite the benefits, Sean Mullaney, financial planner and president of Mullaney Financial & Tax, Inc., says 529 plans can be limiting.

He does not rule them out entirely, but says they work best for a defined purpose.

“I tend to like funding a 529 only when we have a demonstrably academically inclined child,” Mullaney says. Otherwise, he warns, families may have to scramble to use the funds in a penalty-free way.

Because no one can know whether a newborn will eventually go to college, he suggests making smaller contributions early on. Later, the account can be “superfunded” by front-loading up to five years of annual gift-tax exclusions in one year.

Families can also pay tuition directly if that makes more sense.

2. UTMA accounts

UTMA, or Uniform Transfers to Minors Act, accounts are custodial accounts that let an adult manage investments for a minor. Moyer says they are more flexible than 529 plans, but that flexibility comes with less control.

“The gift from the grandparent to the newborn is irrevocable right away,” he says. “When the child reaches the applicable age under state law … the account control transfers to them. At that point, the beneficiary can use it for whatever they want, even if it is something the grandparent wouldn’t have wanted it to be used for.”

Moyer also warns that UTMA accounts bring extra tax issues.

“They do not get tax-deferred growth, so dividends, interest, and capital gains must be reported,” he says. “If a child has enough unearned income, they may be subject to ‘kiddie tax,’ where they pay the tax rate of their parents on unearned income over a certain amount.”

He adds that UTMA accounts are also counted as assets owned by the child on FAFSA, which could reduce the chances of financial aid.

3. Trusts

Trusts can give grandparents another way to pass along wealth to a grandchild.

Moyer says trusts make more sense when the goal goes beyond college support. A trust can be written to control when and why funds become available, such as for buying a first home, education, healthcare or other needs.

A trust can also be designed so the beneficiary gains full access at a future age. But the tradeoff, Moyer says, is complexity.

“Unlike a 529 or UTMA account, a trust would require an estate planning attorney, a trustee to administer the trust … and the trust may have its own tax return and other reporting requirements.”

He also says a trust will likely affect financial aid.

“It would likely be considered an asset of the beneficiary, even if they cannot access it for education purposes.”

Another drawback is the compressed tax structure. Trust income retained inside the trust reaches the top federal marginal rate of 37% at relatively low income levels, just over $15,000, which can create significant tax drag.

4. Trump Accounts

Trump Accounts are a newly launched savings option that grandparents can help fund. The money is invested in low-cost index funds, gains grow tax-deferred, and distributions are limited until the beneficiary turns 18. At that point, the beneficiary takes control and the account effectively becomes a traditional IRA.

Mullaney says the biggest issue is that the accounts are so new that their long-term value is still uncertain.

“529s have been around for decades,” he says. “These plans have decades of managing assets, being legitimate, having account controls, and there’s natural competition because states have their own plans.”

He also notes that Trump Accounts do not offer a tax deduction for contributions, and their effect on financial aid remains unclear.

Even so, he says it can make sense to open one for children born between 2025 and 2028 who qualify for a $1,000 seed payment. He also likes the idea of converting the account to a Roth IRA after the child turns 18, though that would create a taxable event. Having a clear exit strategy matters.

Parents generally open and manage these accounts, but grandparents can still contribute to an existing one. The annual contribution limit is $5,000 per child, not including the $1,000 seed amount.

5. Taxable brokerage accounts

Taxable brokerage accounts do not provide the same tax advantages as 529 plans or Trump Accounts, but Moyer says they still deserve consideration.

“Having that account grow, and then gifting assets to the child when they need it, retains control for the owner [and] helps avoid FAFSA impacts,” he says. He adds that a taxable brokerage account can also help cover tuition, healthcare and other major expenses later on.

Mullaney says that for many affluent families, the most valuable tax benefit may be the step-up in basis at death.

When a grandchild inherits a taxable brokerage account, the cost basis resets to fair market value on the date of the grandparent’s death. That means the grandchild owes capital gains tax only on appreciation that occurs after that date, making it a highly tax-efficient option.

The downside is that the grandparent may not be alive to see the benefits. Still, a hybrid strategy is possible: withdraw some money as needed for the grandchild while allowing the rest to keep growing and transfer after death.

Start with the goal

Giving wealth to a grandchild can be a powerful gift. If you are unsure which account fits best, Moyer says the first step is to define your goal.

If the main objective is education, the best choice may differ from one aimed at helping with a future home purchase. Once those priorities are clear, Moyer says it becomes easier to decide which account, or combination of accounts, offers the right mix of flexibility and control.