One of the primary goals of estate planning is to leave a better future for the people you love. Grandchildren are very much included. Indeed, one of the most common questions that estate planning attorneys hear is: “I’d like to leave something for my grandchildren, but what’s the best way to do it?”
This is a normal inquiry, as grandparents naturally want to position subsequent generations for happiness and success. In considering the best ways to leave an inheritance for grandchildren, though, it’s important to keep estate taxes and other legal considerations in mind.
Often, the best way for grandparents to help a grandchild is to leave money and property to the grandchild’s parents, ensuring the stability of the family unit and indirectly providing benefits to the grandchild. Indeed, nearly every state has some version of a “default inheritance law,” reflecting the general consensus that inheritances should be passed down directly to the next generation without skipping ahead.
However, there may be some situations in which it makes more sense to leave money directly to grandchildren. This is particularly true if there is credible reason to think that the parents will not be good stewards of a financial inheritance, or if the parents are independently wealthy and could face major estate tax exposure if they got an inheritance.
Making Outright Gifts
The simplest way to provide an inheritance for grandchildren is to designate them as beneficiaries in a will or trust, naming them to receive specific gifts or a particular percentage of your overall wealth. This is an especially prudent strategy if the grandchildren in question are all mentally and physically healthy, financially responsible, and have reached adulthood.
However, if the grandchildren are still minors, leaving a direct gift can bring up some estate planning complications. For example, some states may require a court-controlled conservatorship to be established.
It’s also important to note that when a minor child reaches adulthood, there will be no way to control how they spend the money they inherited through a direct gift. They could blow it on fast cars, or even lose it in an unwise marriage and divorce.
Grandparents may wish to put certain safeguards in place, protecting their grandchild’s inheritance from the grandchild’s own wayward spending, from the claims of an ex-spouse, or from unscrupulous business partners. Doing so will involve seeking estate planning solutions beyond direct gifts.
Estate Planning Solutions to Leave Gifts to Grandchildren
Consider a few of the best ways to leave an inheritance to grandchildren, beyond direct gifting.
Using Trusts
Trusts represent one of the most flexible options for leaving an inheritance to grandchildren. Leaving money via a trust allows you some measure of control over how and when the money can be accessed and used. For example, you can direct trustees to manage and grow an inheritance account until the child reaches a certain age, at which point you can indicate that distributions can begin. You may also include provisions allowing grandchildren to use their inherited funds for education.
You may also consider establishing a trust during your lifetime, naming yourself the trustee, and transferring some of your money into the trust for the benefit of your grandchildren. This will allow you to make gifts to the trust using the annual gift tax exemption.
Health and Education Exclusion Trusts
A specific type of trust to consider is the health and education exclusion trust, or HEET. This type of trust uses certain tax code provisions that exclude lifetime gifts that are paid directly to healthcare or education institutions. You can use a HEET to name any number of grandchildren, or members of subsequent generations, as your beneficiaries. The funds in the trust can be used to pay for health and education expenses, without being subjected to gift taxes.
The HEET is worth considering if:
- You are especially passionate about helping grandchildren and other subsequent generations with education and health-related expenses.
- You have used up your GST (generation-skipping transfer) tax exemption with other estate planning strategies.
- You want to use your estate planning to benefit a charitable organization or a non-profit of some kind.
Generation-Skipping Transfer Taxes
We mentioned generation-skipping transfer taxes in the section above. This is a unique form of taxation, and it’s always best to seek advice from an experienced living trust and estate planning attorney when including grandchildren in your estate plan.
For most people who have fairly modest estates, the GST isn’t going to be a big issue. But if what you own is valued more than the current gift tax exemption rate, you will want to plan around the GST, especially if you think any portion of your property will go directly to grandchildren. You should also take the GST into consideration when creating trusts specifically to benefit grandchildren or their descendants.
Keeping Parents in the Loop
One more practical consideration: Grandchildren often neglect to involve parents in the estate planning process. This can sometimes create tension, with parents reacting negatively when they learn about the generous inheritance their own kids received. Depending on parenting philosophy, some moms and dads may not want their kids inheriting lump sums of money, or having particular expenses paid off without their knowledge.
All of this can be avoided simply by ensuring clear, consistent communication. Talk with parents to articulate your wishes to help subsequent generations succeed, and to ensure that this does not violate the parents’ attitudes toward character formation.
Talk with a Living Trust and Estate Planning Lawyer
It’s natural for grandparents to desire a promising future for their descendants, and to make this desire a reality through gifts and inheritances. Clearly, there are a number of considerations to keep in mind, and a range of strategies to ensure effective estate planning. To guarantee optimal outcomes for your grandchildren, and indeed for your entire family, learn more about living trust and estate planning options. Seek guidance from a skilled living trust and estate planning lawyer.
The article above was contributed by the marketing staff of Max Alavi APC, OC Trusts Lawyer, for educational resources. The material is meant for informational purposes only and not to provide legal advice because laws and regulations may differ across states, and each case may be unique. If you have any questions about the content of this post, it is recommended that you seek advice from a local Estate and Probate attorney.
