An old proverb says that “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” Often, the money we work for has more value than the money we are given as a windfall. Work ethic and continuing education are often the fuel for successful careers and financial stability.
As you go through the stages of life, you see more clearly how the wildness of youth makes for impetuous decisions and grandiose gestures while a lifetime of hard work and dedication to your family can produce great wisdom as you age. You start to see how difficult times forced you to grow up and work harder, how difficult relationships made you into a more loving person. Hardships help to hone our character, but as grandparents, it is hard to watch our grandchildren struggle.
But how do you help grandchildren see the value in working hard and valuing good financial choices? Let’s look at how you can fund a trust fund as a way to help but not overwhelm your grandchildren.
You Want to Help
Wanting to help your grandchildren succeed is normal, but if you shower them with gifts and advantages, you might feel anxious that doing so will cause their work ethic to suffer. How many of us have the wisdom with money at 21 years old that we do at 35? How many of us devalue education at 18 but wish we had stuck with it at 28?
How Can I Best Help My Grandchildren?
It is common to want the best for your grandchildren but not know the best way to help. This is where a good estate plan comes in. There are many kinds of trusts that help you control how, when, and what monies are spent for a grandchild over the course of their lives. Working with a knowledgeable expert in the field of estate planning is always a good idea when you are unsure of how to pass savings on to future generations.
Trusts and Taxes
In planning your estate, trusts and taxes must be considered. Let’s take a look at some of the possibilities to help your grandchildren succeed without throwing a life-distracting windfall in their direction all at once.
Generation-Skipping Transfer TAX
Direct transfers of money to grandchildren may be subject to the generation-skipping transfer (GST) tax, which is levied in addition to estate and gift taxes. The goal of planning your estate is to reduce the amount of tax your estate will pay when you pass on. Without proper planning, taxes will take a large chunk of the money you have saved.
SOLUTIONS to GST TAX: Trusts Designed for You
Generation-Skipping Trust (GST)
GST taxes are the reason GST trusts were created. In addition to reducing your estate taxes, GST trusts can also give you the ability to control how and when the money is distributed, thus giving more controlled help to your grandchildren who may need money to buy a home or get married. According to Investopedia “A generation-skipping trust (GST) is a type of legally binding trust agreement in which the contributed assets are passed down to the grantor’s grandchildren, thus “skipping” the next generation, the grantor’s children. By passing over the grantor’s children, the assets avoid the estate taxes—taxes on an individual’s property upon his or her death—that would apply if the children directly inherited them.” Read more about these types of trusts here at Investopedia: Generation-Skipping Trust—GST Definition
Another way to gain control of wild spending is to give money designated for a grandchild’s education using an account specifically designed to reduce your estate taxes and benefit your heirs. You can put in $15,000 each year (married couple $30,000) without gift tax penalties up to a total of $450,000 for each child in 2020. An NC 529 plan can keep funds ready for the day when a child heads off to college. You can find more information on these plans at NC 529 Plan
UGMA and UTMA
Custodial Trusts Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts are also beneficial choices for giving $15,000 per year ($30,000 if married) safe from gift taxes. These are custodian-held accounts that are given to grandchildren at the time or situation specified by you. UGMA & UTMA are not tax-deductible, but are a way to reduce your total estate tax load. You can give up to a total of $11.18 million to these accounts as of 2018 but the portion above the federal limit of $15,000 per person is taxed.
Credit Shelter Trusts
Investopedia defines a credit shelter trust as “designed to allow affluent couples to reduce or completely avoid estate taxes when passing assets on to heirs, typically the couple’s children. … And upon the surviving spouse’s death, the trust’s assets are transferred to the remaining beneficiaries without any estate taxes levied.” Bypassing the other spouse’s estate allows each spouse’s federal estate tax exclusion amount to be used for the grandchildren.
Irrevocable Life Insurance Trusts (ILITs)
If you purchase life insurance policies for your grandchildren, this is another way that you can keep the money you are giving out of probate and immediately provide for your heirs after your death.
You Have Many Options
Whether you choose to open a trust with a custodian in charge or develop a board of trustees to mete out the money, your plans can be detailed and followed to the letter if you plan ahead. Some trusts are Pot-Trusts, where the custodial figure gives as needed to the grandchildren based on your explicit written instructions. Other trusts are tailored to each individual child. Your options are many and varied and depending on what you would like to leave for each grandchild.
The opinion and advice of a trustworthy and knowledgeable attorney will give you peace of mind as you work through your possible solutions. Working with an attorney who knows all of the recent tax and estate laws will give you and your grandchildren every advantage. Asset legacy planning with a trust fund can be complicated on your own, but with the right help, you can have peace of mind knowing that your grandchildren will be provided for in the manner you w