A Smart Way to Spoil Grandkids

As usual, your column is right on the money with timely advice on how grandparents can give gifts to their grandchildren without spoiling them. We have two girls, ages 4 and 2, and they have three sets of grandparents. My wife and I consistently request that the grandparents contribute to college-savings plans we've set up, and they generally oblige. It's gratifying to receive those account statements.

This holiday season, we're also making a point of asking the grandparents to put the brakes on branded toys and focus on good, solidly rated toys that are fun and educational. As you noted, the key is to keep an open dialogue with grandparents about money matters, which is very important to our family.

It's always gratifying to hear about a real-world success story. Not every family is so fortunate. "I'm trying to teach my 13-year-old daughter that she can only spend what she has, but my in-laws always seem to sneak money to her," one unhappy parent wrote to me.

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But I also heard from a grandmother who makes it a policy to limit gifts to $25. "The kids happily make their purchases or save the money, and in return I have their love, attention and time together."

During this giving season, I'd also like to put in a plug for grandparents contributing to state-sponsored 529 college-savings plans. All three generations come out winners: Mom, Dad and the grandchildren get help with tuition, and grandparents get attractive tax benefits.

When you open a 529 account for a grandchild, more than half the states and the District of Columbia will give you a state tax break (see our choices for the best plans in all 50 states).

Plus, you can move money out of your estate -- contributing up to $60,000 (or $120,000 from both of you) at one time for each grandchild and averaging the gift over five years -- while avoiding the gift tax and keeping control of the money if you need it.

You can switch beneficiaries or get your money back by paying income tax and a 10% penalty on the earnings. And the federal financial-aid application doesn't ask about grandparent-owned accounts.

Investing for youngsters

I'd like to open an investment account for my 10-year-old grandson. What's the least expensive way to do this if I'm only going to invest a few hundred dollars?

Use a discount broker such as ShareBuilder, which charges a $4 commission. Or consider a mutual fund with a low minimum investment, such as Hodges fund ($250 minimum) or Homestead Value ($500).