Transferring Assets to Grandchildren

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Planning the transfer of assets to grandchildren is in many ways similar to transferring assets to your own children, with a few exceptions. Grandchildren may be subject to a generation skipping transfer tax, which is levied in addition to the estate and gift tax. In 2017, transfers to grandchildren in excess of the lifetime generation-skipping transfer exemption, $5.49 million, will be taxed at the highest gift tax rate of 40 percent.

It is important to determine the ways in which you wish to assist your grandchildren financially. Is it education? Placing assets into a 529 savings plan, Uniform Gift to Minors Act or Uniform Transfer to Minors Act account is a strategic way to reduce the value of your estate while at the same time achieving your education goals. If you already have a 529 account, it is important to review your successor designation, which stipulates who will take over management of the account should you pass away.  You will also want to be sure your beneficiary designations are up-to-date.

A trust can also be an effective way if transferring assets to adult grandchildren, while also reducing your estate tax and maintaining your influence on the assets even after you have passed away. A simple revocable or irrevocable trust may suit your needs, or you may want to consider one of an array of potential trusts with specific benefits to grandkids (generation-skipping trusts, credit shelter trusts, irrevocable life insurance trust, etc.)

Trusts can be especially useful when transferring to minor grandchildren, as you are able to maintain control over the assets, even after your death. By setting up a trust for you minor grandchildren, you can state how you want the money to be managed, the circumstances under which it can be distributed, and when it should be withheld. You can also determine at what age the grandchildren will able to control the money, either as trustees or full owners.

As much as we like to believe our grandchildren are financially responsible, knowledge of a significant inheritance could make it easier for them to justify leading a somewhat indolent lifestyle, lacking direction and a sense of financial stewardship.  Your grandchild’s trust can be an effective tool for providing financial assistance, as well as motivation by way of incentives. For example, a will or trust may stipulate that receipt of funds be contingent upon graduating college, retaining a good-paying job or maintaining a healthy lifestyle.

For grandchildren or any other beneficiary who may be physically or mentally unable to care for themselves as an adult, you may want to ensure they have the care oversight they need for their lifetime. A special needs trust is one effective way of planning for such a situation.  It is important that you work closely with a financial advisor and/or estate attorney when establishing a special needs trust, as the smallest misguidance could jeopardize the beneficiary’s eligibility for government programs, such as supplemental security income and Medicaid.

In summary, there are multiple ways of transferring wealth to subsequent generations.  No one strategy is right for everyone.  It is a matter of identifying what your goals and objectives are and then working with an experienced advisor who will help create and implement a plan for achieving them.

Brian Rykovich, CFP, is a Wealth Manager with C.H. Douglas & Gray Wealth Management, a wealth management firm located in Indianapolis.

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