If you're considering passing on some of your wealth to your grandchildren, you could gift money to them outright or pay for costs (such as tuition or medical expenses) directly. That said, don't overlook the option of putting money in a trust. In many cases, trusts give you more options for how and when your grandchildren receive funds, says Paul Sowell, Senior Wealth Planner for Wells Fargo Private Bank.
Putting money into a trust for your grandchild lets you:
- Establish guidelines on how you'd like the money to be used.
- Release funds at key milestones over your grandchild's lifetime, rather than all at once.
- Protect the inheritance from certain dangers, such as substance abuse challenges or problems with creditors.
- Help your grandchild meet specific goals, such as buying a home or starting a business.
Establishing a trust
Administratively, trusts can be fairly simple to set up, but they require careful thinking about what you'd like them to accomplish, says Sowell. Plus, gift trusts are typically created as irrevocable trusts — once you've established them, you can’t change your mind and reclaim your money.
Since grandchildren's trusts are legal structures, you'll work with an attorney to establish them. However, you may also want to discuss planning and investment options with your contacts at Wells Fargo Private Bank before you finalize your plans, Sowell says.
Selecting a trustee also requires thoughtful analysis. The trustee is the individual who will be responsible for approving distributions from the trust. Although you can name a family member as trustee, it can sometimes be simpler to work with an objective third party, Sowell notes.
- Individual trustees may be the better choice if a particularly close relationship with the beneficiary is needed (when caring for a parent, for example) or if the trust asset requires specialized knowledge (like running a family business).
- Corporate trustees often are the better choice when there isn’t a trusted individual available who can both manage trust assets effectively and make the hard decisions about when (and when not) to make distributions.
Choose the right trust option
Once you decide that a trust is the right choice for your grandchild, you have two options, Sowell explains:
- A family pot trust for all of your descendants. This option has advantages if you have a large family and want to give discretion to your trustee for distribution of assets. With a pot trust, you set up a single trust, and your trustee can decide when and how much money to distribute to each of your grandchildren or other descendants for their specific, ongoing needs. You can also use a pot trust to leave a continuing financial legacy for multiple generations of your family.
- Individual trusts for each grandchild. These can have advantages if you're leaving assets to just one or a few grandchildren. Most grandparents choose to put equal amounts of money into each grandchild's individual trust.
Give instructions and set stipulations
One of the advantages of establishing trusts for grandchildren is that you can work with your attorney to write specific instructions into the trust language. These stipulations help you to influence how your grandchildren use the funds.
For instance, you can set up your trust to release funds at key milestones — such as when your grandchildren reach ages 20, 25, 35, and 50 — rather than all at once. You can also leave recommendations for your trustee, asking him or her to consider approving distributions that would allow your grandchild to pay for college tuition, buy a first home, or address other goals. Alternately, you could ask the trustee to match your grandchild's funds to buy a new car, rather than pay for the entire car, for example.
"Trusts can be fairly simple to set up, but they require careful thinking about what you'd like them to accomplish." — Paul Sowell, Senior Wealth Planner, Wells Fargo Private Bank
You can also add discretionary language to trusts that allows the trustee to hold back financial distributions in certain cases — such as if your grandchild refuses to get a job, develops a substance abuse problem, is in trouble with creditors, or is undergoing a divorce (to prevent the ex-spouse from taking a share of the money).
Discuss with family
Just as important as coming up with all the stipulations for a trust? Frank family conversations about the concept. "In order to keep family harmony, I don't believe you should ever set up financial gifts for grandchildren without linking in the parents," says Sowell. For one thing, he says, the parents may have strong opinions about inherited wealth and how to prepare their children for it.
You may also want to discuss with the parents how much information to provide your grandchildren about the trusts you're creating for them. Many experts now recommend talking openly to children about inheriting wealth, rather than keeping it confidential until they're older. Doing so can give your family time to educate your grandchildren about responsible money management.
However, Sowell says each family needs to decide for themselves the best time to speak to grandchildren about trust funds and the best way to communicate the information so that awareness of the trust does not affect a particular child's ability to work hard or be financially responsible.
For more information about establishing trusts for your grandchildren, talk to your contacts at Wells Fargo Private Bank and your estate planning attorney.