~ Article by Kevin Ellman, CFP ®
If you want to leave behind a legacy and ensure that your children and grandchildren will be taken care of, there are a number of important factors to consider.
The first step is to figure out what you want to do. Ask yourself the question: What do your children need? If you have two or more children, does one need more help than another? Essentially, the decision you need to make is between treating them equallyor treating them fairly after taking into account their particular circ*mstances. Do they have a particular need such as funds for education or a home purchase? Consider these same questions when thinking about how you would like to provide for your grandchildren.
Next, you need to think about asset protectionor what can be thought of as, putting a “moat” around the money. Say you want to leave money to your youngest child, but are concerned that he or she is not well acquainted with managing money. The best way to do this may be to use a trust, which will allow you to apply restrictions on how the money is accessed. The trust will have a trustee of your choosing to act as an administrator. This person should, first and foremost, be someone you trust. They should also be practical, good with finances and capable of dealing with lawyers and accountants.
The trustee will be tasked with following the terms of the trust that you decide upon when you create the trust. You can be strict and deem the money “for income only,” or you can be liberal and have no restrictions at all. As an alternative, you can leave all the decisions on distributions up to the trustee. In this instance, it would be even more essential that you have complete confidence in the trustee’s judgment. Some trusts use the attainment of various ages as a means of distributing out the money in a trust gradually. For example, you could release a quarter of the money when the recipient reaches the age of 30, and then release the remaining three quarters every 5 years, in order to ensure that it lasts for an extended period of time. Other trusts, sometimes referred to as Dynasty Trusts, are never fully distributed to the beneficiaries and stay in trust for generations.
Trusts are great for leaving large amounts of money. If you are interested in leaving a smaller amount of money and are not overly concerned with how quickly it is used, 529 plans or UTMA accounts are a good option. You could set up a college savings plan for your grandchildren using a 529 plan.
Another option is to leave your IRA to your children. If you do this, make certain you get professional advice to ensure the best tax result. Under the right circ*mstances, when they inherit the account, they may be able to defer the income taxation of the account over their life expectancy, which is typically long period of time.
The best way to leave money behind for your children and grandchildren is to think about how you would like to help each individual and to ensure that the money you leave behind will be both protected and used appropriately.
Learn about the Wealth Preservation Solutions Estate Planning and Asset Protection Process.
Asset protection plans should be developed and implemented well before problems arise. Due to the fraudulent transfer laws, asset transfers that occur in close proximity to the filing of a lawsuit or bankruptcy can be interpreted by the court as a fraudulent transfer. Proper structuring of these assets is imperative. Please seek proper legal and tax advice prior to engaging in re-titling/structuring of any assets. Please note that laws are subject to change and can have an impact on your asset protection strategy.
FAQs
Trusts are great for leaving large amounts of money. If you are interested in leaving a smaller amount of money and are not overly concerned with how quickly it is used, 529 plans or UTMA accounts are a good option. You could set up a college savings plan for your grandchildren using a 529 plan.
What is the best way to leave money to grandchildren? ›
Trusts can be especially beneficial for minor children, as they allow more control of the assets, even after your death. By setting up a trust, you can state how you want the money you leave to your grandchildren to be managed, the circ*mstances under which it can be distributed, and when it should be withheld.
Should I leave my money to my kids or grandkids? ›
For most grandparents, the best way to provide for their grandchildren is to leave their accounts and property to the grandchildren's parents to ensure the financial stability of that family unit, thereby indirectly benefiting the grandchildren.
How to leave your grandkids your retirement savings without a huge tax bill? ›
A gradual conversion from traditional IRAs to Roth IRAs makes sense for many, so children and grandchildren can inherit the money tax-free. The taxes are being paid upfront. Once the money is in the Roth, it grows tax-free, and heirs can take it out tax-free when they inherit.
What is the best way to leave money to my kids? ›
Estate planning tools like wills and trusts are the best options for leaving money to your children because you can outline how and when your children will receive the money. If the child is a minor, you can even dictate how they can spend the money.
What type of trust is best for grandchildren? ›
Trust for Grandchildren
Grandparents can set up a trust for their grandchild. The trust can be either a Revocable Living Trust that becomes irrevocable upon their death, an Irrevocable Living Trust, or a trust that is in their will (a testamentary trust).
Do grandparents usually leave grandkids money? ›
In most cases, grandparents leave their assets to their grandchildren's parents to provide for them. A grandparent's parents are often the best people to help their grandchildren manage their inheritances and can make appropriate decisions about spending or investing their money.
What is the best way to pass wealth to heirs? ›
The best ways to leave money to heirs
- Will. The first is by having a will. ...
- Life insurance. The second way is with life insurance. ...
- Estate taxes. Estates that are worth a lot of money can also owe estate taxes. ...
- Life insurance trusts.
Giving Early Can Reduce Estate Taxes
A posthumous bequest to your children goes through a lengthy court proceeding know as probate, and your money might be subject to estate taxes that reduce your children's inheritance. By giving early, you reduce the size of your estate and avoid probate proceedings.
How can I avoid inheritance tax? ›
How to avoid inheritance tax
- Make a will. ...
- Make sure you keep below the inheritance tax threshold. ...
- Give your assets away. ...
- Put assets into a trust. ...
- Put assets into a trust and still get the income. ...
- Take out life insurance. ...
- Make gifts out of excess income. ...
- Give away assets that are free from Capital Gains Tax.
The federal estate tax exemption shields $12.06 million from tax as of 2022 (rising to $12.92 million in 2023).3 There's no income tax on inheritances.
What is the IRS loophole to protect retirement savings? ›
Backdoor Roth IRAs.
This strategy is called a backdoor Roth IRA. Once income taxes are paid on the initial contributions and gains, retirement savings could grow tax-free without required minimum distributions (RMDs).
Do you want to leave an IRA to your grandchildren? ›
Two more potential benefits of leaving IRAs to grandchildren rather than your children... Young grandchildren tend to be in lower income tax brackets than their higher-earning parents, so the money they withdraw from the IRA is likely to be taxed at a lower income tax rate. (This applies to traditional IRAs.
What age is best to inherit money? ›
Many estate planning attorneys recommend distributing the assets in chunks (typically one-third at age 25, one-third at age 30 and one-third at age 35).
What is the best way to distribute inheritance? ›
The main ways to control the disposition of your estate's assets are writing a will, selecting beneficiary designations, and creating a trust.
- Write a Will. A will is a legal document directing how your property is to be distributed upon your death. ...
- Select Beneficiary and Property Ownership Designations. ...
- Create a Trust.
There is a great verse in Proverbs that says this, “A good person leaves an inheritance for their children's children” (Proverbs 13:22). In its Hebrew form, it means very literally what it says. An inheritance being possessions, endowments, and allotments. It isn't metaphorical or allegorical either.
How much money should grandparents give to grandchildren? ›
You may give each grandchild up to $16,000 a year (in 2022) without having to report the gifts. If you're married, both you and your spouse can make such gifts. For example, a married couple with four grandchildren may give away up to $128,000 a year with no gift tax implications.
Where in the Bible does it say leaving an inheritance for grandchildren? ›
Proverbs 13:22 CSB
A good man leaves an inheritance to his grandchildren, but the sinner's wealth is stored up for the righteous.
What is the average inheritance from grandparents? ›
In 2021, the University of Pennsylvania used data collected from the Survey of Consumer Finances to observe the distribution of inheritance across age, wealth, and relation since 2001. The data showed that the average inheritance received from grandparents was$1,458, and the amount inherited tends to increase with age.
