Tags: will | grandkids | trust | gift

5 Considerations for Adding Grandkids to Your Will

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By Monday, 26 October 2020 06:27 PM Current | Bio | Archive

Watching your children have children of their own can be one of the happiest periods of your life, and it’s no surprise that as more grandchildren are born, you want to consider amending your will to leave some of your legacy to them. Yet when it comes to making changes to your will, there are so many different routes you can take, each one dependent on your personal values. Do you leave them money specifically for education? Should you set an age limit before they can touch the money or consider a trust? What are tax implications of an inheritance that you might be burdening your family with?

Here’s what to consider when you’re ready to change your will for the grandchildren.

1. A trust fund

Trusts are traditionally used to protect high net worth families from some tax exposure on inherited wealth. The majority of inheritances aren’t large enough that families would see an extreme benefit from setting up a trust, a process which can be costly. Data from the federal reserve shows the average inheritance from parents with a college degree is $92,700 and from parents without a college degree is $76,200. After dividing the funds between children and grandchildren, that’s hardly enough money to fit the common trust fund stereotype.

However, people turn to trusts for reasons beyond tax implications. No matter how much you’re leaving to your children or grandchildren, a trust can help protect some of your wishes after you’ve died. You can set terms for how the money is used and when it is distributed. You’ll leave the distribution of funds to an appointed trustee to reduce potential arguments.

You can create a revocable or irrevocable trust, with many variations within those categories. For example, a testamentary trust, which usually accompanies a will, is typically revocable while you’re alive — you can make changes to it. After you die, it could become irrevocable, meaning the person who manages it does not have the power to change any of the details or beneficiaries.

2. Communicating your wishes

If you haven’t previously spoken with your children and grandchildren about your will and finances, start to open that conversation with them now. It can be awkward to start talking about your will, especially if you’ve spent a lifetime avoiding discussions about money. However, bringing your heirs into the conversation now can help reduce a fallout from any surprises later. If it helps, consider bringing your financial planner or estate lawyer into the conversation to explain your decisions.

When you do change your will, be sure to make your wishes explicit in your estate plan. Leave no room for questions about how much money you’ve left each grandchild and how the funds can be used. Specifically name each grandchild in your will so there is no confusion, especially if additional grandchildren are born after you’ve changed your will.

3. A 529 educational savings plan

If you’re looking to specifically fund your grandchild’s education, consider opening a 529 education plan as an alternative to leaving them money in your will. This tax-advantaged account grows modestly through a range of investment options. The beneficiary of the account can use the funds to pay for qualified expenses annually at a college or university or up to $10,000 annually at a public or private elementary or secondary school.

Funding a 529 educational savings plan for your grandchildren ensures that the money you’re giving them will be used only for school. However, it will impact the amount of need-based student aid they’ll qualify for in the future.

4. The tax implications

Any inheritance you leave will have some tax implications for your heirs. For example, if you leave your estate to your grandchildren, as opposed to your children, the estate will incur the generation-skipping tax (GST) that is levied on top of any estate tax. Note that there is a threshold for the estate tax, and it will only apply to the amount of your estate exceeding the cut off, which is $11.58 million.

Essentially, the GST prevents you from transferring your whole estate to your grandchildren in an effort to skirt the estate tax.

You can’t avoid taxes by giving away money or property while you’re alive, either. In the United States, a gift tax is levied. This tax works in tandem with the estate tax: It’s applied at the same rate as the estate tax with the same $11.58 million exemption. Using your exemption for the gift tax will cause your estate tax exemption to decrease by the same amount.

5. Gifting funds while you’re alive

Despite the complication of the gift tax, it is still possible to give some money to your grandchildren while you are alive. There’s a $15,000 annual exclusion for each gift to each done, which means if you have four grandchildren you could gift them all $15,000 each year — a total of $60,000 a year — without running into a tax problem. If you want to give jointly with your spouse, you are each able to give to the maximum exclusion, so you could give $30,000 to each grandchild each year. Keep in mind, if you’re funding a 529 educational savings plan, the money you contribute each year counts toward your exclusion.

If you want to gift money, whether that’s to help your grandchildren set up an emergency savings fund, afford a down payment or travel the world, consider helping them choose a low-fee, high-interest savings account to store the funds until they are needed. To provide even more guidance, compare accounts online and teach them about the value of finding the safest place to store money — especially those types of accounts with APYs as high as 1.00% and no account fees.

Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.



 

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JoleneLatimer
Watching your children have children of their own can be one of the happiest periods of your life, and it's no surprise that as more grandchildren are born, you want to consider amending your will to leave some of your legacy to them. Yet when it comes to making changes to...
will, grandkids, trust, gift
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2020-27-26
Monday, 26 October 2020 06:27 PM
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