Passing Wealth to Grandchildren...The Smart Way

Passing Wealth to Grandchildren…The Smart Way

One of life’s greatest pleasures for a grandparent is having the means to provide a nice inheritance for the next generation and beyond. Passing wealth to grandchildren, while gratifying, must be carefully planned to avoid the beneficiaries losing a large percentage of the gift to estate taxes.

For example, if you choose to leave your entire estate to your children, with the expectation that your grandchildren will eventually benefit, before they receive the inheritance, it will have been subjected to both your estate taxes and their parent’s estate taxes upon their deaths. On the other hand, should you choose to leave your children out of the will and name your grandkids only as beneficiaries, they will incur a 40% generation skipping tax [1] on their inheritance.

There are different ways to transfer wealth to grandchildren that do not incur such a heavy tax burden. Rather than leaving money directly to them, you can set up a trust with you as the named trustee. And because of the annual gift tax exemption, you can make tax-free gifts of a legally allowable amount per beneficiary per year.

Another excellent tax-protected investment vehicle is the health and education exclusion trust (HEET), to which you can give unlimited gifts in order to make payments directly to healthcare or educational institutions in someone else’s name.

It’s Always About the Taxes

While taxes are unavoidable, there are various exemptions that can help reduce the erosion of your estate through taxation. Giving to your grandchildren directly during your lifetime is a smart way to pass wealth. Consider giving each one the maximum annual amount that will not incur gift taxes, currently set at $15,000 per person.

The generation skipping tax (GST) also includes an exemption. Each grandparent has a lifetime exemption amount of $1 million to gift and estate taxes. Married couples are both  entitled to these amounts, so they can give up to $2 million during their lifetime without incurring a GST penalty. Getting an early start is one of the best ways to take advantage of this exemption.

These exemptions apply to Federal taxes, but what about the state in which you live? Fortunately, this is not a concern for residents of the state of California as there is no state-level inheritance tax.

Have Your Cake and Eat It Too

Passing on wealth to your children and grandchildren is an important part of preserving your wealth and legacy, but it takes careful planning and forethought. Estate planning for a HNWI requires much more finesse than the average plan. The tax implications alone are complex, and then there is the possibility of predatory lawsuits and other threats to your ability to take care of future generations in your family.

With the goals of protecting you and your heirs from excessive taxation and future creditors, while also maintaining control during your lifetime, we have developed the Have Your Cake and Eat it Too or HYCET Trust. Click on the link to read more detailed information on this investment vehicle.


[1] Generation-skipping transfer tax

Posted in Trust Advisement, Updates.