Maybe you'd like to give your grandchildren some money, but you don't want to spend your last years in poverty. A solution is to will money to your grandchildren so they'll get it when you no longer need it. You'll probably need professional advice, but here are some issues to consider in advance.
How Long Will It Last?
The statistics about inheritances are sad. According to some financial experts, most people spend money that they inherit within one year.
Considering that you want to give money to your grandchildren, who are presumably younger and less financially astute than the average inheritor, the chances of your money being used wisely are slim.
You can improve those chances by talking to your grandchildren about what you are going to leave them and how you would like for the money to be spent. Of course, they are not obligated to follow your wishes.
Generally speaking, the older your grandchildren are, the better the chances that they won't squander their inheritance. Young adult grandchildren may be better recipients than babies. If you want to leave money to underage children, the money will have to be under the care of a custodian. Choosing the right individual for that job can be a tough decision, too. Parents are the logical choices. Sadly, however, some parents shouldn't be left in charge of their children's inheritance.
Children, Grandchildren or Both?
Are you skipping your children entirely to leave your money to your grandchildren?
Unless your children are very financially secure, they are likely to resent being bypassed. Skipping them to give money directly to your grandchildren implies that you don't trust the parents to use their inheritance for the benefit of their children.
Can Money Be Divided Fairly?
Leaving money to grandchildren isn't as simple as it sounds, because you have to decide a number of issues:
- Will you divide each child's portion among his or her children, or give each grandchild an equal amount? In the latter case, a child with a large number of children will have an advantage, and a childless child would be cut out altogether.
- What if a grandchild predeceases you? That child's portion will need to be allocated to another family member.
- Do you want to make provision for unborn grandchildren? That can be done as well, but it complicates matters.
- Do you want to include stepgrandchildren? They are not your grandchildren in the eyes of the law unless they have been legally adopted by your child. In such cases, they must be given a separate bequest in the will if you wish to include them.
Know Tax Consequences
Most individuals don't pay federal estate tax, because it is assessed only on substantial estates (currently upward of $5 million). Those with a substantial estate cannot avoid estate taxes by leaving their money to their grandchildren, because the government assesses a generation-skipping tax (GST). In such a case, you may want to give money to grandchildren while you are alive, taking advantage of the provision that you can give $14,000 per year to each grandchild without paying gift tax.
No matter which direction you choose to go, if you are fortunate enough to have a large estate, you'll need expert advice to minimize taxes.
Turning to Trusts
Trusts have been used to minimize estate taxes for some time, but they are gaining popularity among the non-affluent, for whom estate taxes may not be a problem. Trusts have a couple of other advantages. Financial assets that have been placed in trust don't require probate and thus don't become a matter of public record. In addition, you have more options over what happens to your money than you have without a trust. Specific types of trusts may be especially suited for grandparents wishing to benefit grandchildren. Ask your lawyer or financial adviser.
Significance of a Bequest
For many grandchildren, it's being remembered that matters more than the inheritance itself, especially if it is paired with a sentimental object from the grandparents' estate.
A bequest is one final chance to tell grandchildren that they are loved.
Learn more about end-of-life planning for grandparents.