For many people engaged in estate planning, providing for their grandchildren is of great importance. Many grandparents wish to make sure that significant needs of their grandchildren are addressed, e.g. paying the cost of higher education.
There are a number of ways in which grandparents can include their grandchildren in an estate plan. The strategies that are best for that purpose would depend on each person’s unique situation and goals.
Among the factors that grandparents would take into account would be the following:
- The ages of their grandchildren;
- The size of their estate;
- What kind of assets in the estate;
- Whether the grandparents want to limit the use that grandchildren can make of their share of the estate; and
- The potential tax consequences.
It is undoubtedly helpful for a person to work with an estate planning lawyer in order to make the best choices when it comes to leaving money and other property to grandchildren.
How Can Grandparents Leave a Lasting Legacy for Their Grandkids?
Of course, a will is a legal document in which a person distributes their assets to the heirs of their choice upon their death.
A trust is a legal entity that is established by a trust document. Basically, in the document the creator of the trust, the “trustor” in legal terminology, names a trustee whose role is to manage the money or other assets that the trustor donates to the trust. Usually the trustee manages the trust so as to increase the value of the trust assets or to generate income for the person who is the beneficiary of the trust.
Both wills and trusts can be part of grandparents’ estate plan when it comes to providing for their grandchildren.
How Can I Leave Assets to a Grandchild in a Will?
One of the easiest ways to provide for grandchildren is by making a direct bequest to a named grandchild in one’s will. In this case, the grandchild would simply receive a distribution of cash or other property from the grandparents’ estate. Making a bequest to a grandchild in a will would be one way to leave personal property of value, such as items of jewelry, furniture and the like, that a grandparent wants to pass on to a grandchild.
Of course the concern with this approach would be the age of the grandchildren and whether they would make the best possible use of the funds or property they receive directly through a will. If the grandchildren are minors, i.e., under the age of 18, a direct bequest in a will is probably not the best choice.
What Is the Right Type of Trust for Leaving Assets to Grandkids?
One way to address concerns related to a grandchild’s age is to leave assets to a grandchild in a trust. A trust can serve as a vehicle to preserve the assets placed in it and to manage how grandchildren can make use of those assets.
Then the issue becomes which type of trust is best for this purpose. There are many different kinds of trusts, each with its own features, and advantages and disadvantages. A few of the trust options are as follows:
- Incentive Trusts: One way to place controls on how a grandchild might use assets left to them is to use an incentive trust. Grandparents might use incentive trusts when they want to promote or discourage certain conduct on the part of their grandchildren.
- For example, the trustor can limit the use of the trust funds. They might limit the use to paying for education or buying a home. It is also possible to mandate that trust funds not be paid out if the grandchild has a problem with drug or alcohol dependance or has problems with excessive debt.
- Another commonly used strategy is to control the age at which grandchildren receive the inheritance, e.g, not until they reach the age of 30. Or the funds can be distributed in specified amounts over a long period of time, e.g. every 3 to 5 years;
- 2503-C Trusts: A 2503-C trust is a trust that is created to benefit a child who is under 21. It permits grandparents to take advantage of the fact that gifts are not taxable up to a certain amount, while still maintaining control over the property until the child reaches the age of majority. Generally, there are 3 requirements for a 2503-C trust as follows:
- There should be no restrictions on the distributions;
- The trustee must have the authority to use the property for the benefit of the minor before age 21;
- The minor must receive the trust assets at age 21;
- Dynasty trusts: If the goal is to protect family wealth for multiple generations, then a dynasty trust might be the preferred solution. A dynasty trust is a long-term trust for passing wealth from one generation to the next while avoiding gift tax, estate tax and generation-skipping transfer tax.
- A dynasty trust must pay income tax on any income from trust assets, so trustors sometimes fund their dynasty trusts with assets that do not generate income, such as the proceeds of life insurance policies.
There are other kinds of trusts as well. It would be very helpful to consult an estate planning lawyer for advice regarding the range of trusts available and which one would best serve a person’s specific goals.
What If I Want to Leave Money to Pay for Higher Education?
A common goal for grandparents is to leave money for grandchildren that they can use to pay the high cost of a college education. Again, an incentive trust or other kind of trust might be perfect for this purpose. There are a couple of other options as well.
Can a Grandparent Utilize Tax-advantaged Accounts Such As 529 plans?
One option for grandparents is to use a 529 college savings account to save for the college education of grandchildren. It is possible for grandparents to open 529 accounts for grandchildren.
However, one potential negative factor to consider is the impact such an account can have on the grandchild’s ability to get financial aid. If the parents and the grandchild intend to rely on need-based financial aid to fund the grandchild’s college education, then saving in a 529 plan can count against them when they apply for this type of aid.
The federal application form for need-based financial aid is supposed to be revised so as to eliminate many questions about untaxed income. If this were to happen, then grandparents would not have to be concerned about the effect of their 529 contributions on their grandchild’s financial aid application.
The changes were to go into effect in the 2023 to 2024 year, but they were put off to 2024 to 2025. If the changes are not delayed again, then gifts made by grandparents through 529 accounts in 2022 and subsequent years would not affect eligibility for need-based financial aid.
What Are the Tax Consequences of Gifts and Inheritances?
Knowing about the state and federal tax consequences of gifts and inheritances can be key to estate planning. Having the help of estate planning and tax attorneys can be quite helpful. It is important to keep in mind that state and federal taxes on gifts and inheritances that might be owed would be paid by the giver or the testator of a will and not the recipient of the gift or inheritance.
The tax consequences of giving money outright as a gift can vary according to the amount given and other circumstances. However, as of the present time, the first $16,000 that a person gives to a grandchild in a single tax year is not subject to a federal gift tax. If a person pays the medical bills or tuition of another person, these payments are not subject to federal gift tax at all.
If a person receives property as an inheritance, again, they would not owe any federal tax. Any taxes owed in connection with an estate are paid by the estate. And it is important to recognize that the vast majority of people do not owe estate tax because their estates are not large enough to be subject to that tax.
What Are the Best Strategies for Reducing Tax Liability?
As can be seen from the information above, there are a wide variety of options for including grandchildren and the tax consequences depend on the exact strategy that a person wants to use. A person would consult an estate planning attorney and a tax attorney if tax avoidance is a major consideration for them.
Does a Grandparent Need to Name a Guardian for Their Grandchildren?
A grandparent who is not the guardian or custodian of a grandchild usually would not name a guardian for the child in their will. That would be the responsibility of the parent or parents. However, if a grandparent is the custodian or guardian of a minor grandchild, then under some circumstances, they might want to name a guardian.
A person would want to consider several factors when selecting a guardian. Of course, if possible, selecting a person who is familiar to the child and has a positive existing relationship would be ideal. A potential guardian’s ability to take care of the grandchild would also be a major consideration.
Should I Discuss My Estate Plan with My Grandchildren’s Parents?
Of course to the extent possible, grandparents would want to discuss their giving plans with the parents of their grandchildren. Ideally, grandparents and parents might coordinate their giving to maximize the benefit to the grandchildren as well as other benefits, e.g. tax avoidance.
It is undoubtedly best to ensure that everyone is on the same page regarding inheritance plans. Of course, for a variety of reasons, that might not be possible in all situations. It is something about which grandparents would have to reflect.
Do I Need to Consult Professionals about Including Grandchildren in My Estate Plan?
As can be seen from reviewing the information above, there are a number of options for leaving a legacy for grandchildren in a person’s estate plan. Each option has its purpose and its advantages and disadvantages. The situation is further complicated by the fact that each one has its own potential tax consequences. For that reason, it is vitally important to consult both an estate planning lawyer and a tax lawyer as well.
There are numerous resources available online to help grandparents get started. The Internet can be a good place to begin the process of thinking about goals and the like. But when it comes to setting up the actual plan, it is best to work with qualified professionals in person.
What Are the Key Takeaways for Grandparents in Estate Planning?
Clearly, given the number and variety of options, grandparents must begin by carefully considering the needs of their grandchildren, their ages, and the ways in which the grandparents want to contribute financially to the welfare and success of their grandchildren.
The next steps would involve consulting the right professionals, e.g estate planning and family attorneys, in order to identify the best methods for realizing their plan. LegalMatch.com is the place where grandparents can quickly connect to attorneys who can guide them to an estate plan that best meets their needs.
