Creating a trust for a grandchild requires not only an understanding of one’s financial goals but also a deep appreciation of the legal complexities involved. Grandparents with considerable assets will need to navigate the potential pitfalls of estate planning, including tax ramifications and the nuances of trust law so that their wealth provides the intended support for their heirs. Even one improperly structured trust can result in unnecessary taxes, mismanagement, or even intra-family conflict, diluting the very legacy intended to benefit the grandchild.
Understandably, concerns about the effective transfer of assets are significant, as the prospect of future legal obstacles for the grandchild can cause considerable distress. Focusing on establishing the trust’s accessibility and flexibility to adapt to the grandchild’s evolving circumstances is paramount. As such, these challenges necessitate the guidance of an adept Virginia trust and estate administration attorney.
We can help. The attorneys at Midgett Preti Olansen are experienced at formulating tailored trusts that address these specific concerns, providing tax-efficient strategies while maintaining the necessary adaptability for your beneficiary’s future. Doing business with our Virginia Beach law firm means your estate plan is executed with precision, reflecting your intentions and safeguarding your grandchildren’s inheritance.
If you plan on leaving your grandchildren an inheritance, it is imperative that you consider going beyond the creation of a will and consider a trust. Trusts are useful legal tools for safeguarding the passage of assets and allow you to determine the terms in which those assets transfer, especially if minor children are involved. You can set milestones that must be reached in order for distribution of funds, such as college or vocational school graduation, or the turning of a certain age. You can also use a trust to help a grandchild meet a particular goal, such as going to medical school, studying overseas, purchasing a car, starting a business, or purchasing a home.
When it comes to the beneficiaries of the trust, your attorney will help you determine whether you should create a trust for each individual grandchild or just one for the family overall (also known as a “pot trust”). Also, you will designate a successor trustee who will serve as the fiduciary and be responsible for the management and distribution of trust assets at the appropriate times designated by the trust terms. It is also possible to provide for the grandchild to have direct or shared control of the trust and its assets once they reach a certain age.
There are several beneficial reasons for setting up a trust for your grandchild, including the four listed below.
Setting up a trust for a grandchild’s education is an assured way to pass that inheritance on to them. You determine how much is to be used for educational purposes, and the definition of what educational costs are allowable. Used in conjunction with a traditional 529 plan, a trust designed to provide for a grandchild’s educational expenses provides maximum flexibility.
A trust is a good option when you want to ensure that money will be used for the benefit of your grandchild in circumstances where the beneficiary or their parents are not good with money or they have creditor issues. That way, the money you earmark for the grandchild can only be used in certain ways as you instruct, removing the decision-making process from someone else. It goes without saying that choosing the right trustee is critical.
Money left in a trust for your grandchild will not be subject to claims of a divorcing spouse, which is important since you want that money to go to a specific person – your grandchild and not their spouse. Additionally, as part of your asset protection measures, any money left for the grandchild may be passed automatically to their children upon their passing. By leaving an inheritance in trust, you can avoid the risk of money left outright to your descendants passing to a surviving spouse who might get remarried and have children with another person.
Setting up a trust document allows for more options than a simple will-based estate plan. By creating a trust for your grandchild, you can leave money to be accessed at different times for different reasons. You may want to provide monthly distributions to give them a head start in life or designate a lump-sum distribution amount once they reach a certain age so that they can either stay home and raise children or have the ability to experience more options in life, whether that be vacation, buying real property, or selling a business.
If you create a will to leave a specific inheritance to a grandchild, it may not be managed in the way you imagined. If these assets are left to a minor, the probate court will keep control of them until adulthood. Yet, an eighteen-year-old who comes into this inheritance may not be equipped for it, leading to mismanaged funds.
In addition, if you have a grandchild with special needs, leaving assets to them can jeopardize their access to government benefits (e.g., Medicaid). These are all considerations to keep in mind when undergoing estate planning and determining the best way to leave assets to a grandchild.
While every family’s situation is different, the type of trust that you need to create for your grandchildren will be dependent on what your intentions are and what you would like to leave.
A standalone trust may be a good option for you if you have substantial assets. Gifts to these types of trusts are not considered future interest gifts. Instead, they are considered present interest gifts, which is a good thing. It is important to note, however, that at the age of 21, your grandchildren will have a window in which they can withdraw all of the assets from the trust. If they do not withdraw anything from the trust during that specific window of time, the included assets will remain intact up until distribution can occur in accordance with the terms of the trust that you include.
Another option is a trust designed to skip one generation and distribute assets directly to your grandchildren (or more remote descendants). A generation-skipping trust (GST) can be beneficial in minimizing transfer taxes, leaving more to your grandchildren in the end. However, be aware that a federal GST tax exists and is imposed on those asset transfers that skip a generation. There are ways, however, to avoid liability with this type of trust, including an allowable tax exemption.
Creating a special needs trust is dependent on whether your grandchildren fall into this category and will benefit from it. This type of trust protects your grandchild and provides supplemental distribution of assets for their needs while also avoiding the possibility of jeopardizing government-provided program benefits, such as Medicaid and SSI.
A revocable living trust will provide for your heirs and can also be revoked or amended by you at any time throughout your life. You remain in control of all trust assets while you are alive, and you may amend or revoke the terms of the trust anytime.
This type of trust will hold designated assets intended for grandchildren and allow you to name a trustee that you feel confident will manage and protect the assets for the trust’s duration. In addition, you can include instructions for the staggering of grandchildren’s inheritance, especially if they are minors. Access to the trust assets can begin immediately after your death and not have to go through the probate process.
The rule against perpetuities was created in order to eliminate one’s ability to tie up assets in a trust indefinitely. As such, under state law, trusts have a definitive deadline for when they must expire – twenty-one years after the death of the last-named person on the trust. However, under the Virginia Code, you are able to waive the rule against perpetuities, and this is a legal way to keep wealth in trust for generations. Your Virginia Beach trust attorney will be able to explain the significance of the rule against perpetuities and how it can affect your trust and also help you waive your perpetuities so that your grandchildren and even great-grandchildren will benefit.
While you may be on board with creating a trust for your grandchildren, it is also essential that you know how each type will be taxed so you can make the right decision for your family members. With a revocable trust, any income generated by the trust during your lifetime will be taxable directly to you. If you choose an irrevocable trust with a separate tax identification number, a tax return is usually required, and taxes can accumulate. Who pays the income tax on an irrevocable trust depends on whether the trust is considered a grantor (you pay the tax) or non-grantor trust (the trust pays the tax). If the trust is a non-grantor trust, and distributions are made from the trust to the beneficiaries, then the beneficiaries or a combination of the trust and the beneficiaries will be liable for the income taxes.
In addition, if you choose a generation-skipping trust, a specific tax will result. This generation-skipping transfer tax (GST) is a federal tax that applies to the transfer of property by inheritance or gift that intends to skip a generation. The goal of the GST is to prevent families from avoiding the paying of estate taxes for one or more generations. However, avoiding the GST is possible by specific allocation of your GST exemption and a properly designed trust.
The gift tax consequences of transferring assets to a trust can be tricky. If you are transferring assets to a revocable living trust, then no gift tax applies. If you are transferring assets to an irrevocable trust, then generally those gifts are subject to gift taxes. However, you may be able to take advantage of the annual gift tax exclusion or your gift tax exemption amount to shelter these transfers from gift tax.
The gift tax annual exclusion amount increases annually. For example, in 2022, the exclusion exempted gifts up to $16,000. In 2023, the tax-exempt amount increased to $17,000.
The attorneys with Midgett Preti Olansen realize that each individual necessitates different needs for their estate plan. When you have numerous assets and an accumulation of wealth, your estate plan may become more elaborate and complex. We understand this and can help tailor an estate plan to your needs or provide legal advice or counsel for an existing estate plan.
If you wish to leave assets to grandchildren, including real estate, the intricacy of your estate plan becomes more involved and will require a knowledgeable attorney to help you find the best approach. While a will is important, setting up a trust for one or more grandchildren is a step in the right direction, allowing you to stay involved and manage the funds that go into that trust. If a grandchild has special needs, further precautions will need to be taken to protect their rights.
There are a number of estate planning tools that can benefit your situation, and understanding what these are will help in the decision-making and planning process. For example, what type of trust will benefit you the most? Virginia law provides for different types of trusts, including a living revocable trust, testamentary trust, self-settled spendthrift trust, and more. Each type has different requirements for setup and ongoing management, and you’ll need to take these into account before getting started. Your Virginia Beach estate planning attorney can outline the available options for your individualized estate plan and make recommendations based on your particular circumstances so that grandchildren and even great-grandchildren’s inheritances remain protected over the long term.
Estate planning is a valuable way to express your wishes and provide instructions to loved ones on how to distribute assets to your descendants, including grandchildren. The experienced Virginia estate planning attorneys with the law firm of Midgett Preti Olansen treasure the attorney-client relationship and are here to help you choose the best options for your particular circumstances and level of assets. We will also continue to stay involved for as long as you and your heirs need us. Find out more by calling our Virginia Beach law office at 757-687-8888 and making an appointment, or use our online contact form to get in touch.