Leaving money to your grandchildren is one way to make sure they're able to be successful if you have the means to do so. Education costs are rising and the cost of living is soaring, so our younger people need all the financial assistance they can get. The problem is, money left is usually money spent.
There are some key aspects to consider when you are looking into leaving money to your family members. Inheritances generally do not last past your children. From the stable to the stars and back again, as the saying goes—it takes two generations to build success, and one to blow it. Gifting more than $15,000 leads to large gift taxes. So what can you do to help your descendants with their finances?
You can mitigate some of the taxes, and lower the risks of your gift being spent by leaving a trust for your family members and establishing a tradition of financial learning and responsibility.
Turning to Trusts
Trusts have been used to minimize estate taxes for some time, but they are gaining popularity among the non-affluent, for whom estate taxes may not be a problem. Trusts have a couple of other advantages.
First, financial assets that have been placed in a trust don't require probate and thus don't become a matter of public record. Also, you have more influence on what happens to your money with a trust fund.
Specific types of trusts may be especially suited for grandparents wishing to benefit grandchildren. You can choose from different types of trusts, such as individual trusts or pot trusts. A pot trust is a trust for multiple people to use with a trustee designated to oversee the spending.
Revocable trusts can be altered, changed or canceled by the grantor. Irrevocable trusts are set in stone once established. Both are subject to different types of taxation but can be beneficial when leaving money to your descendants because you can set terms on how it is to be used.
You may want to consider annual gifts to your grandchildren while you are alive, taking advantage of the provision that you can give $15,000 per year to each grandchild without paying a gift tax. This is called an annual exclusion. If you are married, you and your spouse can each give a gift for a total of $30,000 without taxation.
If you gift more than the excluded amount, you are taxed on the amount over $15,000 per person. So, if you gave your granddaughter $25,000, you would owe taxes on $10,000 of it.
You could also look into a 529 savings plan for your grandchildren. In these education plans, you can gift $15,000 for 5 years, which can then be used tax free for education.
Estates and Taxes
You are able to leave your estate to your grandchildren. Most individuals don't pay a federal estate tax, because it is assessed only on substantial estates ($11.58 million in 2020). Those with a substantial estate cannot avoid estate taxes by leaving their money to their grandchildren, because the government assesses a generation-skipping tax (GST).
Establish an Environment of Financial Responsibility
Many people are raised in homes where talking about family finances is a taboo topic. The problem with this is that children do not know what to do with their money once they have some, except spend it.
Not all parents have money to spare to teach their children how to use it. For those in this situation, it is necessary to talk about your finances with your children so that they can begin to process the information you are giving them.
If you have money to spare, you could consider giving your children a balance to work with. Make them pay some bills, and teach them to consider future needs while creating an understanding of budgets. Teach them to assess needs and wants, and how to work for both.
If they gain an early understanding of bills, saving money, and how you can put money to work for you they will enter adulthood more fully prepared. They will also be more likely to pass on the financial knowledge you have given them, along with any other knowledge they gain on their own.