By Megan Gebhardt of Gebhardt Law Office, Estate Planning and Wills Attorney (and PEPS mom)

Many grandparents want to leave a gift to their grandchildren. Before establishing a trust or making other gifts, grandparents should make certain they have sufficient assets to pay for their own needs during their lifetime. If they are ready to use their estate to provide for their grandchildren, there are good options available:

Trust for Grandchildren

Grandparents can set up a trust for their grandchild. The trust can be either a Revocable Living Trust that becomes irrevocable upon their death, an Irrevocable Living Trust, or a trust that is in their will (a testamentary trust). The decision about the type of trust affects the control that the grandparent exercises over the trust assets during their lifetime.

The grandparents can designate the purpose of the trust, how the trust is managed, by whom it will be managed, and the ultimate distribution of the trust to the grandchildren. It also offers creditor protection when compared to giving the same money to the children to hold for the grandchildren, or to the grandchildren outright.

One example is a Trust for Grandchildren which allows grandparents to set aside money for their grandchild’s education. Education can be defined broadly to include summer camp or travel abroad, or restrictively to include only tuition for accredited 4-year institutions. The grandparents can designate someone to act as trustee of the trust to manage investments of trust assets and distributions of the trust. The trustee can be a family member, friend, or a professional. The trustee can even be the grandparents if they are using a Revocable Living Trust. Grandparents can also set ages at which the grandchild can take the remaining assets of the trust outright, i.e., 50% of the remaining trust assets at 30 and the rest at 35, and include spendthrift provisions to protect the child from receiving a distribution at inappropriate times.

The trust provides further protection of assets; when the assets are in trust, they are protected from the debts of the children and grandchildren. For example, credit card debt of the parents would not be payable from the trust. If the same money was not in trust and given to the children to hold for the grandparents, it could be used to satisfy that same debt.

Grandparents can gift up to $14,000 a year, per grandchild, to a trust for a grandchild and those cumulative gifts will not count as a part of their taxable estate, thereby reducing the estate tax or generation-skipping transfer (GST) tax that may be due upon death. These amounts will not incur any gift tax. The Federal taxable estate exclusion and gift tax thresholds in 2015 are $5.43 million at the federal level, so more extensive gifting can easily be made with those limits, and any applicable state limits, in mind.

Other Options

Grandparents can also make outright “annual exclusion” gifts to the grandchild up to $14,000, and pay education and health care costs directly, completely tax-free and without the need to report the gift to the IRS. Grandparents can also purchase 529 plan credits for grandchildren.

Planning for your grandchildren can be a joyful process and a way to provide financially for your grandchildren. Your situation will be unique, depending on your needs and your family. For complex legal and financial decisions like trusts, seek the support of a professional for guidance.

About the Author

Megan lives in Seattle with her husband and two sons (ages almost four and 16 months). She is the Owner of Gebhardt Law Office, and focuses her practice exclusively on estate planning. She serves as Western Division Chair of the Washington First Responder Will Clinic and as a volunteer speaker for PEPS groups. She is an enthusiastic supporter of PEPS and always recommends it as the first thing to sign up for when she finds out someone is expecting. Her family is still close with their PEPS group and hopes to remain so for the years to come.