For those who are considering transferring wealth to grandchildren, some may elect to gift money outright or pay tuition or medical expenses directly on their behalf. However, others may choose the option of establishing a trust. In certain instances, a trust may provide you with more alternatives for determining how and when your grandchildren receive funds, says Paul Sowell, private wealth strategist at Wealth & Investment Management.
Establishing and funding a trust for your grandchild may enable you to:
Trusts require careful thinking about what you’d like them to accomplish, says Sowell. When established during your lifetime, trusts intended to transfer funds to family members are typically created as irrevocable trusts — once you’ve established them, you usually can’t change your mind and reclaim your money.
Since trusts for grandchildren are legal structures, you’ll work with an attorney to establish them. However, you may also want to discuss wealth planning and investment options with your financial advisor before you finalize your plans, Sowell says.
Selecting a trustee also requires thoughtful analysis. The trustee is the individual or entity that is responsible for approving distributions from the trust. In addition, trusts also require recordkeeping and reporting, and the trustee is responsible for those tasks as well. Sowell notes that although you may be able to name a family member as trustee, it can sometimes be beneficial to work with an objective third party.
Discuss with your attorney whether to appoint an individual trustee, a corporate trustee, or both as part of the estate planning process. Factors such as the nature and size of assets and family dynamics are all considerations.
If you decide that a trust is the right choice for transferring assets to your grandchild, there are many considerations and ways to structure the terms, with advantages and disadvantages depending on the size of your family, Sowell explains. The following are only a couple of limited examples. You should consult with your estate planning attorney to discuss the most appropriate terms to help accomplish your unique goals.
With a pot trust, a single trust is established for all of the trust beneficiaries. The terms of the trust may then give discretion to your trustee to determine when and how much money to distribute from that single pot of money to each of your grandchildren or other descendants (if they are beneficiaries as well) based on a specific standard or desired objective written into the trust. The pot trust may specify that all of the beneficiaries be treated equally, or it may allow the trustee to make unequal distributions among the beneficiaries based on their individual needs. You can also use a pot trust to leave a continuing financial legacy for multiple generations of your family.
Many grandparents choose to create separate trusts for each grandchild and put equal amounts of money into each grandchild’s individual trust. The trustee can then decide when and how much money to distribute to each grandchild from their individual trust based on the standards written into the trust.
One of the advantages of establishing trusts for grandchildren is that you can work with your attorney to draft specific language in the trust. These provisions are helpful to the trustee in the administration of the trust for the benefit of the grandchildren.
For instance, you can set up your trust to distribute funds when the beneficiaries attain certain ages — such as 35, 45, or 55 — rather than all at once. You can also leave recommendations in which you ask your trustee to consider approving distributions for paying college tuition, buying a first home, or addressing other goals such as starting a business. 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.
To help the trustee understand your intentions, a commonly used standard for discretionary distributions is health, education, maintenance, and support (also known as “HEMS”). The trust document may include a broader standard than HEMS or no standard at all. Sometimes the trustee is directed to make distributions by another party, such as a distribution committee or a trust advisor. Your estate planning attorney can help you understand the benefits of these different distribution standards.
Frank family conversations about the concept of a trust are just as important as coming up with the stipulations of that trust. In order to help keep family harmony, it may be beneficial to include 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. Talking openly to children about inheriting wealth — rather than keeping it confidential until they’re older — 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 remove the incentive for a grandchild to become financially independent or financially responsible.
For more information about establishing trusts for your grandchildren, talk to your advisor and your estate planning attorney.
Don’t have an advisor?
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Wells Fargo Trust is a part of WIM and offers services through Wells Fargo Bank, N.A. and Wells Fargo Delaware Trust Company, N.A.
Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice estate law in your state.
