Leaving an inheritance to your grandchildren can help set them up for success later in life. But it’s often not as simple as leaving them money. It’s possible that a large portion of your estate may go toward paying various taxes such as estate tax, gift tax, and generation skipping transfer (GST) tax. And that’s just taxes. There are also the potential costs of settling your estate, including the potential costs of probate. All of these fees and taxes deduct from the amount that makes it to your loved ones.
Thankfully, plenty of strategies exist to help you make the most of the money you choose to give to your grandchildren. Let’s explore your options below.
Speak with a financial advisor to discuss your estate plan today. Contact Modern Family Asset Management.
When it comes to leaving an inheritance to grandchildren, trusts are often one of the first things that come to mind. Trusts can be a great way to leave money to minors or to adult grandchildren, but they can be especially beneficial for grandchildren who are minors.
One of the biggest benefits of a trust, compared to other inheritance options, is that it gives you some control over how and when your grandchild can use the funds. For example, you can specify the age you would like your grandchildren to be before they can access the funds, or you can specify that before a certain age the funds can only be used for something specific, such as education expenses. A few trusts that may be ideal for grandparents hoping to leave money to their grandchildren include generation skipping trusts, credit shelter trusts, and irrevocable life insurance trusts (ILITs).
The IRS currently allows you to gift up to $15,000 per individual, per year without having to pay any taxes. That means you can give each of your grandchildren up to $15,000, each year. This then decreases the amount of your estate that’s charged an estate tax. Though $15,000 may not sound like a lot, if you have multiple grandchildren and gift each of them the full amounts each year, this can add up to a significant impact on your estate. An additional benefit to gifting money to grandchildren, especially if they’re adults, is that they can use the money sooner, as opposed to waiting for an inheritance.
Helping Cover Education Costs
Another great option is to help fund your grandchildren’s education. Many different types of accounts exist that help parents and grandparents save for education expenses. Some of the most popular college savings accounts include 529 plans, Uniform Gifts to Minors Act (UGMA) accounts, and Uniform Transfers to Minors Act (UTMA) accounts.
Each of these accounts has its own unique advantages and disadvantages. For example, some accounts have strict rules on what the funds can be used for, while others have almost no stipulations and allow the children to use the funds however they so choose. Before creating a college savings account, you should speak with the parents of the child and any other loved ones involved in saving for education expenses to ensure everyone is on the same page.
Transfer on Death (TOD) Designations
One simple strategy that is easily overlooked is ensuring that beneficiary information is up to date on all assets and accounts. By designating who you would like an account to pass to after death, you can simplify the estate process and even potentially minimize the amount of your estate that goes through probate. While you may have designated a beneficiary when you opened the account, you may also want to check that none of the beneficiaries need to be updated.
Don’t Forget About Your Needs
Leaving an inheritance to your children or grandchildren can help make their lives easier, but it’s important not to give to others to the detriment of yourself. Make sure you know how much you’ll need as well. Retirement often costs far more than people realize.
For example, many people, even those with health insurance, may end up with large medical bills at some point during retirement. You’ll also need to consider how taxes and inflation will affect your retirement plans. Since retirement planning can often be incredibly complex, you’ll likely want to work with a financial advisor to help make sure you’re prepared.
Speak with a Financial Advisor
Estate planning can be a complex and emotional process. But preparation now can help ensure that your loved ones are taken care of later on. For personalized strategies to address leaving money to your grandchildren, speak with a financial advisor at Modern Family Asset Management.