7 ways to include grandchildren in your estate plan

by Amelia Donovan | Contributor
Jun 30, 2020

There are several different tools that you can use to provide for your grandchildren in your estate plan. When deciding the best strategy, you must work with an estate planning professional and consider your unique situation.

For many retirees, grandchildren are a top priority when creating an estate plan. Grandparents want to ensure that their legacy is passed on and their grandchildren are provided for in the future. There are several different estate planning strategies available to help you achieve this goal. The tools that are best for you will depend on your unique situation. Factors such as the age of your grandchildren, the size of your estate, how you want your inheritance spent and the tax consequences will determine which strategy is best for you. 

With so many different options out there, it is critical to work with an estate planning professional to make informed choices about the best way to leave money to your grandchildren. Below are summaries of seven common ways to provide for grandchildren in your estate plan.

  1. Lifetime giving

Gifting your inheritance to your grandchildren during your lifetime is an option that many individuals should consider. A grandparent can gift up to $15,000 a year without triggering the federal gift tax. Together a couple can gift $30,000 annually. Lifetime giving removes property from your estate, lowering your estate’s tax liability after your death. In addition to the tax benefits, giving while you are alive allows you to experience the joy of seeing your grandchildren receive your gift.

Lifetime gifts for education expenses and medical care are exempt from gift tax regardless of the amount, as long as the payment is made directly to the educational institution or medical provider. As of 2020, the lifetime gift tax exclusion is $11.58 million individually and $23.16 million as a couple. When deciding whether to make a lifetime gift, it is critical to make sure that your current and future needs are taken care of first.

  1. 529 Plan

One significant way that grandparents can help future generations is to assist with increasing education costs. Contributing to a 529 plan allows grandparents to provide for their grandchildren’s future educational needs (tuition, fees, books, supplies, room, board, etc.). Contributions qualify for the $15,000 annual gift tax exclusion, and individuals can elect to make a lump-sum contribution of up to $75,000, spreading the gift over five years. Furthermore, funds in a 529 plan are not considered part of your estate and can reduce estate tax exposure.

Beneficiaries of a 529 plan can be changed at any time, allowing grandparents the flexibility to meet the unique educational needs of all their current and future grandchildren. Grandparents should be careful to keep their successor designation up to date. The successor is the individual who will take over the management of the 529 plan at the time of your death.

  1. Incentive trusts

If you are worried that your inheritance will be squandered or not put to the use that you imagined, an incentive trust is a useful tool to consider. An incentive trust is designed to encourage or discourage certain behaviors by placing restrictions on the trust property. For example, you could require that the trust funds only be used for education, buying a first home or starting a business. You could also require that trust funds are held back if your grandchild develops a substance abuse problem, refuses to get a job or is in trouble with creditors.

Through a trust, you can also control at what age your grandchildren receive the inheritance. For instance, you could restrict access to the funds until the child reached age thirty. Another option to consider is to have the funds doled out in set amounts over a long period of time, such as every five years.

  1. 2503-C trust

A 2503-C trust is a trust that is created to benefit a child under the age of 21. It is a unique option because it allows grandparents to take advantage of the gift tax exclusion while maintaining control over the property until the child reaches the age of majority.

Generally, to qualify as a 2503-C trust, there:

  1. Must be no substantial restrictions on the distributions
  2. The trustee must have the power to use the property for the benefit of the minor before age 21
  3. The minor must receive the property at age 21

If the child dies before age 21, the trust property is paid to the child’s estate.

  1. Dynasty trust

If your goal is to protect your family’s wealth for multiple generations, you should think about creating a dynasty trust. A dynasty trust is a long-term trust designed to pass wealth from generation to generation, without incurring gift tax, estate tax or generation-skipping transfer tax. You must pay income tax on income generated by trust assets, so many individuals fund the trust with non-income producing assets, like life insurance policies or tax-free municipal bonds.

  1. Specific bequest in a will

Grandparents have the option of leaving a specific bequest to their grandchildren in their will. You can either provide the grandchild with a fixed amount or a percentage share of the estate. However, this method has no tax advantages and offers no control over how your grandchildren will use the inheritance.

  1. Uniform transfer to minors account

A uniform transfer to minors account (UTMA), sometimes referred to as a custodial account, is another way for grandparents to pass money down to their grandchildren. Transfers into UTMA accounts qualify for the gift tax exclusion, and money is put into the account on an after-tax basis. The assets in the account must be paid over to the child once they reach the age of majority, and the grandparent cannot restrict how these funds are spent.

Any income earned on the property in the account is taxable to the minor at the minor’s tax rate. The parents of the child should be involved in the decision to create a UTMA account because they will be responsible for these tax payments.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life’s contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial, and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by the Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services-company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at https://legacyassuranceplan.com

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Legacy Assurance Plan
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University Park, Florida 34201
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