It is a pleasure to introduce you to my guest columnist, Coventry Edwards-Pitt.
Covie offers practical guidance to grandparents who want to do right by their grandchildren when it comes to leaving them inheritances.
Coventry Edwards-Pitt, CFA, CFP, is the Chief Wealth Advisory Officer at Ballentine Partners, a firm that specializes in providing investment and wealth management advice to wealthy family and entrepreneurs.
Covie is also the author of the book Raised Healthy, Wealthy & Wise: Lessons from successful and grounded inheritors on how they got that way.
Also a trained opera singer and pianist, Covie serves on the board of Emmanuel Music in Boston. She is a member of the Women’s Presidents’ Organization as well as the Collaboration for Family Flourishing, a community of professionals and family members devoted to helping families flourish across multiple generations of wealth.
She lives in the Boston area with her husband and daughter. [email protected]
Guidelines for Planning Grandchildren’s Inheritances
Any grandparent leaving an inheritance to a grandchild hopes the gift will serve as a tangible symbol of love for the grandchild and create opportunity in the grandchild’s life. Yet, without some planning, a gift may have exactly the opposite effect.
Let’s look at some of the common pitfalls that grandparents might encounter when leaving bequests and how best to avoid them:
1. Leaving “small” gifts outright to grandchildren
A grandparent may feel that a financial gift is “small” in the grand scheme of either their own wealth or what they perceive to be the wealth within which their grandchild is being raised. “Small,” of course, is relative, and might mean $25,000 to one person and $100,000 to someone else.
The trouble arises when the grandparent, thinking the gift is “small,” leaves the gift outright, rather than in trust, to the grandchild. Outright gifts go directly to the grandchild if he/she has reached the age of majority by the time the grandparent dies.
If the grandchild is then still a minor, the bequest will be paid into a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account (an UGMA or an UTMA). When the grandchild reaches the age of majority (usually 18 or 21 – depending on the state) he or she will legally own the assets and can use them as he or she wishes.
Why is this a problem, you may ask? Well, it turns out that coming into money – even a relatively “small” amount of money – at a young age can have a serious impact on a maturing adult’s ability to find their own footing and become financially self-sufficient. It’s not uncommon in my industry to see young adults living completely non-productively off of “small” amounts of money – for instance, $28,000 annually. After all, $28,000 is the after-tax equivalent of a job paying north of $40,000, a fairly decent entry-level pay for a young adult coming out of college.
While it’s not always the case that money deters motivation, in my field it is by far the norm rather than the exception to see access to ready capital have the damaging effect of robbing a young adult of the economic necessity to struggle through the early, uncomfortable, confusing years of work.
A grandparent may find that their outright gift has exactly the opposite effect than they intended – what they hoped would be a runway to opportunity ends up being a parachute to nowhere that allows the child to flit non-productively through some of the most critical developmental years of their lives. To avoid this problem, it’s best for grandparents to leave even relatively “small” amounts of money to their grandchildren in trust.
2. Leaving bequests in trusts
There are a number of factors that a grandparent will have influence over when establishing a trust for a grandchild, for instance who the trustee will be, at what age assets will be distributed to the grandchild, and for what purposes, whether the grandchild will be able to become a co-trustee of the trust at any point, and whether the grandchild will have the ability to withdraw a percentage of the trust assets. This is a rather overwhelming list of questions for the grandparent to contemplate, especially since the answers will have far reaching influence over the grandchild’s life and how he or she interacts with the inherited assets.
My advice is for grandparents to consult their grown children to hear their preferences about how they would like the trust designed for the grandchild. The grandparent may even find that there is already a trust the parents have established for the grandchild that could be used as a repository for any bequest. Even if not, it’s important for the grandparent to make sure that that any trust they design will work in such a way that reinforces and supports the planning the parents have done, rather than the opposite.
For instance, if the parents have created a trust for their child in the event of their own deaths that allows the trustee discretion over when to distribute assets to the child (allowing a trustee to withhold assets if they observe the child having a drug problem or other life event that would discourage a distribution), the grandparents do not want to establish a trust that pays the inheritance out to the grandchild in a lump sum at a specific age.
Lest any grandparents reading this are thoroughly spooked by the complexities above, let me reassure you that it’s not all pitfalls. A grandparent wanting to leave a bequest has a generous, loving intention, and there are many ways in which a grandparent can harness this intention to make a gift that will have a lasting benefit in the life of a grandchild. The best planning opportunities in this vein often result when parents and grandparents coordinate on the topic of gifts to grandchildren:
1. Paying school tuition
For instance, if grandparents would like to make gifts to their grandchildren during their lives, they might consider paying for their grandchildren’s schooling. Not only does a gift like this have a wonderful message behind it – “we value education and giving you an opportunity to develop your skills and reach your potential” – but it also has a number of gift and estate tax benefits. Payments of tuition directly to a school – primary, secondary, and/or college or graduate school – do not count as gifts from the perspective of the gift tax that the grandparents would owe but do reduce the size of the grandparents’ estate that will be subject to estate taxes.
2. Inheritance bypassing parents’ generation
Another idea grandparents and parents may want to discuss is whether the parents would like their inheritance to bypass their generation and go directly to their grandchildren in trust. This has the benefit of saving estate taxes on those assets upon the death of the parents and might be a wonderful planning technique as long as parents and grandparents are in agreement on the terms of the trusts that will benefit the grandchildren.
The driving motivation behind any grandparent’s wish to give is love. With the right planning, grandparents can avoid the unintended consequences and confusion that their gift might create and set the stage for their gift to have the best lasting effect in the lives of their grandchildren.
Ask Dr. Gramma Karen is published every other Tuesday.
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