Best Ways to Benefit Your Grandchildren

When planning your estate, some of the best ways to benefit your grandchildren are:

1. Putting funds into a 529 plan for their benefit. Money going in now will come out tax-free later if used for qualified higher education expenses. You can put in $65,000 in year one per grandchild without any gift tax penalty.

2. Take full advantage of trust law. Use spendthrift clauses so as to protect the funds from your grandchild’s creditors and potential lawsuits. A spendthrift clause is a clause that states that the right the beneficiary (the grandchild) has to the income and-or principal income shall not be subject to the claims of the grandchild's creditors. The result is that if the grandchild gets sued or his wife files for divorce, the funds you have left to that grandchild in trust for their benefit will be protected from those claims. This is how we keep money in the family.
3. Incentives can be built into the trust. For instance, if assets are held “in trust” for the benefit of a grandchild, then the terms of that trust can provide that the grandchild's earned income will be matched by the trust funds. Earned income can be funneled into a retirement account for the grandchild. The trust funds can match what the child earned and this match can be distributed to, or for the benefit of, the grandchild so the child benefits in the short run and the long run from their efforts.  Thus, you will have planned for a double benefit for your grandchild in that they can take full advantage of tax deferral and compound interest by fully funding their own retirement plan. This can be hugely beneficial for them later. It can go a long way to ensuring they learn the value of serving others.

4. Leave them IRA assets protected “in trust” and income tax deferred based on their life expectancy. Wow! The results can be amazing when you combine trust law for protection and careful shaping of incentives and primary uses for the funds such as education and income tax deferral. If the trust is drawn properly, you can leave assets in inherited IRAs that are held in trust. If the terms of the trust are properly crafted, the IRA distributions can be stretched over the life expectancy of the grandchild and these distributions can be used to fund the trust. The trust can use spendthrift clauses and incentives to protect the property from unnecessary loss and also encourage productive positive behavior. Now, that’s good planning.

Contributed by

Mark F. Winn, J.D., LL.M. in Estate Planning, is a local tax, asset protection and estate planning attorney.