Leaving an Inheritance to Grandchildren: What Works and What Backfires, From a Santa Barbara Estate Planning Attorney

Many of our clients light up when they talk about their grandchildren. They want to help with college, a first home, or simply a good start in life. Leaving an inheritance to a grandchild is a wonderful goal. How you leave the gift matters as much as how much you leave.

Can I leave money directly to a minor grandchild?

You can name a minor in your will or on a beneficiary form, but a child cannot legally manage an inheritance. A court may need to appoint an adult to oversee the money, and the process can be slow and costly. In many cases, whatever remains is handed to the grandchild outright at 18 or 21, depending on state law and the type of account. Few grandparents picture an 18-year-old receiving a lump sum with no guidance.

What works better?

• A trust for your grandchild. You choose a trustee to manage the money and set the terms. You might allow funds for education, health, and a first home, with the balance paid out in stages at ages you select.
• Education savings accounts. Accounts designed for education can be a good fit for college goals. A financial advisor can explain how those accounts may affect financial aid.
• Lifetime gifts with a purpose. Paying for lessons, camp, or tuition lets you see the gift at work.

Walter and June wanted to leave equal amounts to their four grandchildren, ages 6 to 22. A simple trust let the oldest receive part of her share soon, while the youngest’s share stays managed until he is ready.

What tends to backfire?

• Naming a minor directly on life insurance or a retirement account. Doing so can trigger the court process described above. Inherited retirement accounts also come with tax rules that deserve planning.
• Leaving money to a parent “for the kids.” The parent has no legal duty to use the funds for the grandchild, and the money may be exposed to the parent’s debts or divorce.
• Overlooking a grandchild with a disability. A direct gift could affect eligibility for important benefits. A special needs trust can provide for your grandchild while protecting those benefits.
• Skipping the family conversation. Surprises can strain the relationship between your children and grandchildren.

What if more grandchildren are born later?

A well-drafted plan can include future grandchildren automatically. Your plan should also say what happens if one of your own children dies before you. Do that child’s children receive the share? The answer should be yours, written down clearly.

Should I tell my children about my plans?

In most families, yes. Your children are raising your grandchildren, and they can tell you what would help and what might cause friction. A short conversation now often prevents hurt feelings later.

A gift that fits each grandchild

A thoughtful plan lets your gift arrive at the right time, in the right way, for each grandchild. If you would like help choosing the best approach for your family, contact us at (805) 946-1550 to meet with a Santa Barbara estate planning attorney. Bring your questions, and photos of the grandkids are always welcome.