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As you get older, it's only natural to start thinking about the financial well-being of your youngest family members. For many people, that might include leaving money to grandchildren to help with expenses like college or their first home. But like all aspects of estate planning, transferring assets to your loved ones requires careful deliberation.
Each family is unique, so when developing an estate plan to benefit your beneficiaries, you might consider how to address your grandchildren's needs without inviting any unnecessary legal challenges or creating an undue tax burden. While you should also consider speaking with a tax or legal expert, here are some things to keep in mind.
1. Consider a Trust for Minors
If one or more of your grandchildren are minors, you might want to leave your assets to a trust. A trustee — whether it's a financial institution or an adult who's close to you — would manage the distribution of the funds when you die.
A trust can help allow you to spell out your wishes in detail. For example, you could specify that you want some of the money withheld until after your grandchildren reach the age of 25 or 30, or when you think they'll be able to manage the money responsibly.
2. Distribute Equally or Based on Need?
For adults with more than one grandchild, one of the biggest decisions is whether to distribute your assets equally. Some grandparents opt to bequeath the same amount to every grandchild in order to minimize hurt feelings later on.
But if one grandchild has substantially greater needs — for example, he or she has a physical deficit and requires in-home care — you may want to consider leaving more money to that individual. For younger grandchildren, you could consider creating a "pot trust," where the trustee has the discretion to give an unequal amount of assets to the grandchildren based on present or future needs.
3. Think Through the Tax Implications
There are a number of ways to leave financial assets for your children's kids. Therefore, you might want to think about how you intend your grandchildren to use the funds and what taxes will apply. A life insurance policy, for example, generally leaves behind a tax-free death benefit. Of course, there are fees associated with buying life insurance that you may also want to consider.
Leaving a retirement account to your grandkids is another way to transfer assets after you die. However, before choosing this option, you may want to consult with a tax professional.
4. Be Mindful of Your Beneficiary Forms
A will is an estate planning tool to help the executor carry out your wishes when you're gone. But the financial institution holding your assets generally has a legal obligation to leave them to the person or people listed on your beneficiary form, even if it contradicts the instructions in your will.
To help avoid any problems, you might want to make sure to properly fill out the beneficiary forms for all your banking, investment and retirement accounts and check them periodically. You may realize that the list of people you wanted to receive your assets 10 years ago isn't the same as those you would choose today. Keep in mind that if you're married, you may need your spouse's written consent to name other beneficiaries to a 401(k) or IRA.
5. Take Care of Your Needs, Too
While you may be tempted to help out with your grandchild's college tuition or first car, being overly generous may also lead to problems. Even if it looks like you can easily afford those gifts based on your current budget, that equation can quickly change. You may live longer than you expect, creating a need for extra financial resources. Or you could end up needing significant medical care or a nursing home stay, either of which can magnify your expenses.
So before opening up your checkbook, you may want to do some long-term budgeting that takes into account potential illnesses and other unplanned expenditures. After you've taken care of your own needs, you might have a better understanding of what's left over for your family.
