Grandchildren, Trusts, and Estate Planning

One of the most preferable ways of leaving assets behind for your grandchildren is to name them as beneficiaries in your will or a trust. Trusts are useful because they make it possible for you to control your assets even after your die. Through a trust, you can state how you want the money you leave behind to be managed.

You can set the circumstances under which the money will be distributed, how long it should be withheld and what age you want your grandkids to be before they can control their portion of it. Also, you can decide whether you want your grandchildren to be co-trustees or full owners.

In fact, you can be even more specific. For instance, you can make decisions about the way your grandchildren use the money you pass down to them.

As an example, you can set the precedent that says your grandchildren can only use the funds for educational purposes. Some grandparents state that their grandchildren can have access to the funds only for the sake of buying their first home or starting a business.

Others may place restrictions that withhold funds if their grandchild develops a substance abuse problem, refuses to get a job or ends up in trouble with creditors. Last but not least, you can also restrict the release of funds until your grandchildren reach a certain age. Another option is creating milestones so that the funds are released in increments over a set period of time. A further option is to allow the assets to remain in trust long-term as a form of asset protection.

Estate Tax Breaks

When you have a trust, you can reduce the amount you owe in estate taxes. And there are various types of trusts you can choose from based on your preferences and your grandchildren’s situations. Let’s take a look at five different types of trusts that grandparents can utilize when working on their estate plans:

• Generation-skipping trust. This makes it possible for trust assets to be passed along to non-spouse beneficiaries who are two or more generations younger than you. Plus, the assets can be transferred without incurring the consequences of the generation-skipping tax.
• Credit shelter trust. You can make use of the federal estate tax exclusion amount for each spouse. This can positively benefit your children as well as other beneficiaries because it allows you to bypass the estate of the surviving spouse.
• Irrevocable life insurance trust. Another idea is to purchase a life insurance policy. This is a great way to provide your beneficiaries with benefits that are immediately accessible when you die. These do not usually pass through probate, meaning your beneficiaries can access them right away.
• 2503(c) trust. As an option that was specifically created to benefit children under the age of 21, this type of trust enables you to control your property until the point at which your grandchildren reach the official age of majority.
• Dynasty trust. This option is designed to protect familial wealth for generations to come. You will pay income tax on the income that is generated by trust assets, which is why many people fund their trusts with non-income-producing assets. Tax-free municipal bonds are one example of this.

Did you know that you can gift up to $18,000 of your inheritance per year to each of your grandchildren (providing they are over 18 years of age)? You can do this during your lifetime without having to deal with the federal gift tax return. Even better, two people who are a couple can gift up to $36,000 per year, which results in a reduction of the tax liability of their estate. So, as you can see, gifting money when you are alive means you can benefit tax-wise while also experiencing the joy of seeing your grandchildren receive money from you.

It is important to remember that monetary gifts you pass along to your grandchildren for education expenses or medical care are exempt from the gift tax entirely as long as payments are made directly to the educational institution or medical provider. Contributions to a 529 plan are not considered part of your estate either, so they also can reduce your estate tax responsibility.

You can use the estate planning process as an opportunity to update the successor designation. Take a moment to identify who will take over the management of your estate in your absence.

You might want to contribute to your grandchildren’s future education beyond a 529 plan. By opening a Uniform Transfers to Minors account for your grandchildren, you can further reduce the value of your taxable estate. Transfers that you make to this account can qualify you for the gift tax exclusion on an after-tax basis. The catch is that grandparents cannot restrict how these funds are utilized.

If you are interested in the idea of including your grandchildren in your estate plans, it’s wise to reach out to an estate planning professional. We can help you determine what your best strategy is, which will help you ensure that your legacy is passed on to your grandchild in ways that meet your expectations.

We can also help by factoring in the ages of your grandchildren, the size of your estate, how you want your inheritance to be dispersed and what you can expect as the tax consequences of your estate plan.

Do you have questions?

Count on your experienced team at Ericson, Scalise & Mangan, PC to provide you with sound guidance for your Estate Planning, Elder Law, Real Estate, Probate, Trust & Estate Administration, and other legal needs. For assistance, contact us today at 860-854-3809, or email us at info@esmlaw.com.