Save for your grandchildren

Grandparents will do anything for their grandchildren. They are also taking a more active roles in their lives in taking over babysitting duties while both parents have to go out to work. With the Baby Boomer generation sitting on a lot of wealth that they accumulated and Gen X finding it difficult to get by, grandparents are helping out their kids and grandkids financially. But you need to make sure it’s done properly.

Gift Tax Exemptions

You can gift anyone €3,000 a year. If there are two of you, you can gift your grandchild a total of €6,000 a year tax free. It does not have to be declared against their future inheritance, which is limited to €32,500 between grandparent and grandchild.

If your grandchild is young, there is little point in it sitting on deposit earning no return. In fact it will lose value over time once inflation has eroded its value over time. If you are going to invest €6,000 a year, it is a good idea to invest the money so it grows over time.

Bare Trust Structure

When setting up a savings plan for a young child, one of the options is to set it up under a trust structure. The assets are controlled by the trustee, usually the grandparent and/or parents on behalf of the child until they are 18.

When the child is 18, they can take control over the assets. Now, if all goes well, the trust could be valued at over €150,000 by the time the child turns 18. Who wants to give an 18 year old that much money? But as an adult, the child is legally entitled to it. But you can agree with the child that the trustees will continue to manage the trust on their behalf.

Under the bare trust structure, any growth on the investment is treated as belonging to the child and therefore is not subject to Capital Acquisitions Tax and the initial €6,000 payment has availed of the gift tax exemption.

Assigned Policy

Another method is to assign the plan to the child’s name. The child is entitled to the proceeds of the investment plan as under the assignment, they are the owner of the policy. A number of steps have to be done in sequence for this to take effect:

  • The grandparents set up the policy and it is issued in their name.
  • Immediately after the policy is issued and before any money is paid in, the policy is assigned to their grandchild.
  • The €6,000 contribution can then be made.

It is important to be aware that under this approach, it is not possible to switch funds, so you need to pick an investment strategy that you will be happy with for the full investment term.

Under both approaches, you do not have to wait until the child is 18 and pass the money on to them. You can encash the money while they are still a minor but it must be for the full benefit of the child. An example of this would be a grandparent using this method to pay for secondary school fees for their grandchild.

With inheritance tax thresholds relatively low in Ireland and the tax paid is high at 33% (Sinn Féin want to increase it to 36%), gifting small amounts of money over time is a good method to pass on your wealth in a tax efficient manner.

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