One of the joys of grandparenting is enriching the lives of our grandchildren. You may be thinking about creating trusts for your grandchildren to be used when they reach adulthood. Some trusts are earmarked for education purposes only and others are open to be used at a certain pre-determined age for any purpose.
The Goals of a Grandchild Trust
You want to establish a savings plan that is of mutual benefit to both you and the recipient.
You want control the accessibility to your funds during your lifetime.
You want ease of management—a trust that doesn’t complicate the rest of your estate.
You want flexibility to create a trust tailored to each of your grandchildren as they may have varying needs and life plans.
You want a plan that includes the parents in setting individual goals.
The Benefits of a Grandchild Trust
Grandchild trusts will lower your estate tax when you make annual gifts to their accounts.
You’re allowed to give up to the current exclusion amount annually. (The amount you can transfer without being taxed.)
In the U.S. there is a lifetime cap of one million dollars allowed to place in trust for grandchildren. You’re saving for your grandchild’s benefit while receiving tax breaks.
529 Plans in the U.S.
529 plans in the U.S. are those established for the sole purpose of paying for educational expenses. There are unique to each state with varying rules and regulations. It’s important to know all the rules before taking money out of 529 plans as any infractions may put part of the funds into a taxable arena.
Earnings on 529’s are not taxed when money is taken out to be used for college expenses.
Some U.S. states offer tax deductions or credits when you have a 529.
The donor is in control of the funds.
529’s are considered easy to manage—a “set it and forget it” fund.
Contributions are not reported on annual federal tax returns. They are considered part of a gift tax exclusion.
529’s are flexible. Investments can be changed twice in any calendar year.
Eveyone can participate. There is no income requirement, no age limit or annual contribution limits.
Grandchild Trusts in the U.K.
In the U.K. there are several choices when setting up a trust for your grandchild. In the past A and M trusts (accumulation and maintenance trusts) were considered the best options for grandparents. However the fees to set up and manage the accounts can amount to several hundred pounds per year and the income accrued is not tax free.
Another choice is called a Bare Trust which is considered to belong to the grandchild from inception and thus is taxed at lower levels. The Bare Trust cannot be given to another child and if necessary, reverts to the parents.
Establishing trusts for grandchildren is a complex matter and, as we can see, is variable by country and location. It’s important to get the proper information from your financial advisors to avoid excessive taxation while providing the best resources for your grandchildren’s future.
For more information see:
www.elderlawanswers.com (type in your trust question)
www.moneyobserver.com ( search grandparent trusts)
