Leaving money to a grandchild can be more complicated than it appears at first glance. Here are some of the frequent questions that come up during my consultations, along with factors to consider.
Q: Can I just name my grandchild as a beneficiary on my life insurance policy?
A: You could, however this could make things more complicated when you pass away. For example, if the grandchild is under 18, they will need an adult guardian to manage that property until the child reaches age 18. This can result in a longer Estate Administration process and even a court guardianship proceeding for the minor child. Things can also get trickier if the minor grandchild has parents that are divorced. The end result is that your money could be managed by someone that you never intended.
Q: My grandchildren are all in college, so can’t I just name them as a beneficiary on one of my accounts?
A: Yes – but there may be a better way. The first thing to consider is how much the grandchildren will receive as a direct beneficiary of the asset. If the asset is a life insurance policy with a death benefit of $100,000, it may not be advisable for your grandchild to inherit a large lump sum of money for a variety of different reason. First, if they have creditors or delinquent student loans, then they can take a bite out of the money you left for your grandchild. Second, if they get a divorce and the assets are comingled with the divorcing spouse, then that spouse can take a chunk out of the money you left specifically for your grandchild. Third, they may spend the money quickly on an expensive purchase and fail to invest any of the inheritance. These issues may be preventable with a Revocable Living Trust.
Q: Can I add a provision in my Last Will and Testament to leave money to my grandchildren?
A: Yes. However, a secondary issue to consider is that if you have assets in your sole name when you pass away, then there will first have to be a court probate process. Your Personal Representative would have to get approval from the court to distribute all of the assets to your beneficiaries – including your grandchildren. You should also consider the same factors outlined previously when you add a provision in your will for the benefit of your grandchildren.
Q: If I have a retirement account, like an IRA, 401(k), 403(b), TSP, or other qualified plan, does it change anything in terms of adding a provision for my grandchildren in my Last Will and Testament or Living Trust?
A: Yes. As of January 1, 2020, the SECURE Act was passed. Under this new law, most designated beneficiaries of an IRA or other qualified plan must take all distributions from the plan by the end of the 10th year after the death of the plan participant. The old general rule was that a beneficiary can stretch the required distributions out over their life expectancy, thereby reducing the amount of income tax that they would pay each year. Therefore, the SECURE Act accelerates distributions over a 10 year period for most beneficiaries. However, one big exception to the 10 year rule is when the owner of an IRA designates their own child under the age of majority (or in most cases their child’s sub-trust) as a beneficiary of the IRA. In this case, their own child is able to use their life expectancy with regard to required minimum distributions until they reach the age of majority. What this means, is that there would be less income tax owed each year. When the child reaches the age of majority, the 10 year rule applies. Therefore, if a minor grandchild is receiving a qualified Retirement Account either through direct beneficiary, a Last Will and Testament, or Living Trust, the 10 year rule applies because they are not a child of the owner of the qualified Retirement Account. It may be a good idea to speak with an Attorney at Sinclair Prosser Gasior to assist you with your estate plan as a result of this new change in the law.
Q: What is the best way to leave money or assets to grandchildren?
A: One of the best ways is using a Revocable Living Trust. The first thing to consider is the age of the grandchildren and their financial maturity. After that, you should then consider the age in which you would want them to manage their own money. Finally, you should consider who you would want to be in charge of that grandchild’s money until they reach the age that you have designated. To illustrate, a grandparent could establish a sub-trust under their Revocable Living Trust for the benefit of their grandchild. They want the grandchild to be in charge of their money at age 30. Prior to age 30, they appoint the grandchild’s father as the trustee to manage the money until they reach age 30. They also appoint a backup trustee in the event the grandchild’s father is unable to serve as trustee. This strategy allows you the most control, it keeps the money within your bloodline, it can offer protection in the event your grandchild gets a divorce, and you get to specify who you would want to receive the money if your grandchild passes away.