Leaving an inheritance to a family member can be a momentous and life-changing act. For grandparents, in particular, there's a lot to consider. How much will you give? How much will your grandchildren actually need? Do they need money now to pay for school or buy a home? And who will manage the money?
The main worry for many grandparents is whether their grandkids will make good use of the money. While it's difficult to know for sure, there are some steps you could take to encourage good spending behavior. This is what estate planning is all about: protecting your assets and providing the best for your loved ones.
There are many options available for grandparents who want to leave behind a legacy, including trusts, life insurance policies, individual retirement accounts (IRAs), 529 college savings plans or Uniform Transfers to Minors Act (UTMA) savings accounts. There are also many considerations that could help you decide on the right plan of action.
Who Will Manage the Money?
If you're concerned about who will properly manage the funds, you might consider appointing a trustee through a trust. A trust is a legal entity in which a trustor (in this case, you) gives a trustee (the person who will manage the trust) the right to hold property or assets for the benefit of a beneficiary (in this case, your grandchild or grandchildren). Many people choose a trustee who they consider trustworthy and good at managing money. This could be a trusted friend or relative, or even an attorney.
There are many ways to set up a trust to reflect your wishes. For example, it could be written to prevent a grandchild from spending inherited funds in a carefree manner. A trust could be drafted so a portion of the funds, say 25 percent, is distributed to your grandchild by age 25, half of the fund by age 30 and the remaining funds by age 35. This would stretch the assets out over a longer period.
How much you decide to leave your grandkids might depend on their current level of wealth. Maybe your grandkids are already working? If so, how much do they make? Taking this into account may provide you a better idea of how much to leave.
What Are Their Needs?
If your grandkids need funds now for their education, for example, you might offer to pay their tuition directly to their schools. Doing this could also help you avoid gift taxes. If your grandkids need school funds later, a trust could be drafted to limit distribution of funds for use only toward education and related expenses.
If the child has special needs, inherited trust money can be put toward their medical care. Beyond that, a trust could even be written to attribute funds toward quality-of-life expenses such as clothes, vacations, buying a home or other purchases that could help them live a more comfortable life.
When leaving money for school, you could also consider a 529 college savings plan. This is a state-sponsored plan that allows savings to be invested in a variety of investment options. These funds could be used toward qualified higher-education expenses, including tuition and books. Each state has its own rules regarding 529 college savings plans.
You could also consider giving money to your grandchildren while you're alive for a variety of needs, including a home downpayment. You can give up to $14,000 to each grandchild per year without having to pay taxes on this money.
What Are Your Giving Options?
In addition to trusts, 529 college savings plans and monetary gifts, there are many other giving options available. Life insurance is a popular choice, as it could help your loved ones with expenses and financial obligations they may not be able to cover themselves — or it could simply provide them an extra cushion.
An UTMA savings account is another option to consider. This is a custodial account that enables a grandparent or any other donor to leave securities, real estate, life insurance, fine art, patents and royalties for the benefit of a minor. The assets are held in this custodial account until the child reaches the age of majority.
IRAs could also be left to grandchildren. This allows your beneficiary to receive money each year over a lifetime while the remaining money in the account grows tax-free. You could also leave your IRA to a trust under their name, with instructions on how the money should be used after you pass on.
There are many options when it comes to leaving money to your grandchildren. Leaving behind a legacy could lead you to ponder many questions. It's important to look at all your options and consider what's right for your situation and family. This could help bring you the peace of mind that comes with knowing your wishes will be properly carried out — to the benefit of your loved ones — when you're no longer here.