Leslie A. Farber
Guidelines for Leaving Grandchildren an Inheritance
#Estateplanning often involves transferring assets to #grandchildren. Determining how to
leave an inheritance or property to your grandchildren is not always a simple process,
because there are multiple issues that must be considered.
Common questions include what happens if a grandchild dies before you, whether or not
stepchildren should be included, and making provision for unborn grandchildren. You
may also need to determine how you will balance what you leave for a child with a large
number of children and a child who is childless. Unless you have good reason not to, it
also is advisable to include your children in your estate planning, as well as your
Wills, trusts and retirement plans are the most common vehicles used to transfer assets to
grandchildren, and each has its advantages and disadvantages. For many individuals,
how they choose to transfer assets is driven by tax consequences; for others, the decision
rests largely on whether their grandchildren are adults or minors.
Leaving money to a minor in your will can be complicated and costly. Because a minor
does not have the legal capacity to receive assets, a court must appoint a Conservator to
receive the inheritance as well as an overseer to monitor the Conservator. When the
minor beneficiary turns 18, he or she will receive the assets and be free to use them as
Trusts are a great vehicle for transferring wealth to anyone, and can be particularly
beneficial for you and your minor grandchildren. You have more control over what
happens with your money and property than with a will, even after your death. When
setting up a trust, you can appoint a reliable trustee and state how you want your assets to
be managed and the circumstances under which they can be distributed. You can also
determine the age at which your grandchildren can take control of the money as either co-
trustees or full owners.
Creating a trust to leave an inheritance to a minor or young adult also keeps the court out
of the process. Financial assets that have been placed in a trust do not require probate
and therefore will not become a matter of public record.
For many grandparents, the primary motivation for leaving property in trust to
grandchildren is to minimize taxes. Before choosing this direction, it is important to seek
the advice of an experienced financial professional to make sure you understand the tax
rules and regulations.
For example, many individuals do not pay federal estate tax because it is assessed only on
estates upward of $11.4 million for individuals or $22.8 million for married couples.
However, those with such a substantial estate cannot avoid estate taxes by leaving their
money to their grandchildren because the grandchildren may be subject to the Generation
Skipping Tax (GST).
The GST applies a second layer of tax, in addition to estate and gift taxes, to trusts that go
from grandparent to grandchild. Under the 2018 Tax Cuts and Jobs Act, the GST
exemption is the same amount as the estate exemption. Alternatively, you may want to
consider giving money to your grandchildren while you are alive and take advantage of
the provision that you can give $15,000 per year to each grandchild without paying a gift
tax (lifetime gift tax exemption is $11.4 million).
Retirement plans offer another option for passing along your assets to your
grandchildren, but they are also governed by strict regulations. For instance, with an
IRA, if you are married you may need written consent from your spouse to designate
your grandchildren beneficiaries. Since only the spouse of the deceased has the option of
rolling retirement plan assets into their own IRAs, your grandchildren would generally be
required to begin taking required minimum distributions (RMDs) soon after your death
and pay the associated income taxes.
In addition, your retirement plan assets will be included in the federally taxable value of
your estate, resulting in estate tax liability when you pass away. The rules for 401(k)s
and other qualified retirement plans are similar to those for IRAs.
Wills and trusts are complicated and constantly changing. Working with an experienced
estate attorney will help you determine how best to leave an inheritance to your
grandchildren. Feel free to contact our office at 973-509-8500 x213
The contents of this writing are intended for general information purposes only and
should not be construed as legal advice or opinion in any specific facts or circumstances.