Trust Services and SIMPLIFY
Giving to the Grandchildren (Part One)
The following was taken from
Your Life…Well Spent
by Russ Crosson, Executive Vice Chairman and EVP of Ronald Blue Trust. Part two of this article will be published on May 8, our next blog post.
It’s a mystery to me why some grandparents, unwilling to leave large sums of money to their own children because they were not trained to handle it, will leave significant sums to grandchildren who cannot even talk or walk yet. These grandchildren have yet to be trained in spiritual and social capital, let alone financial stewardship.
I recommend that, for the most part, grandparents not give cash gifts or assets to their grandchildren, either outright or in trust. Instead, this money should go to their adult children, the grandchildren’s parents. Even though this recommendation is inconsistent with sophisticated tax-planning techniques such as income shifting and generation skipping, a trust can put grandchildren at a disadvantage. Since their parents have no control over the trust’s ultimate distribution to them, the grandchildren could develop a slothful attitude as they grow up while they wait for the trust to fund their lifestyles.
Outright gifts or gifts in custodial accounts can also be harmful. These monies are immediately available to the child or, in the case of custodial accounts, will be available at the age of majority (18 or 21, depending on the state). In most cases, a young child is better off having too little money than too much. Also, if the parents are teaching the child some fiscal responsibility, the grandparents’ gift of a significant sum could undo all that the parents seek to accomplish with the child.
Any cash gift to a grandchild should only be made after consulting the parents: first, to discuss the impact this money could have on the child and second, to agree on the expected use of this money, which can then be discussed with the child. This does not mean grandparents cannot give their grandchildren small cash gifts as they would toys and clothes on birthdays and Christmas. However, grandparents should talk with the parents about what constitutes a small gift. For some, the allowable limit may be $20; for others it may be a $100. Also, the amount may increase with the age of the grandchild. Timing of the gifts should have some bearing as well. To give a grandchild $100 on a birthday might not pose a problem, but to give the grandchild $100 every time the grandparents come to visit could be too much.
Is there ever a good time to leave significant cash or assets to grandchildren? Yes, if the money is given for a predetermined purpose and if the parents agree to it. For example, the grandparents could fund the grandchild’s college education. College education and private school are two areas typically outside the traditional guidelines of parental obligation of support, which include food, shelter, clothing, public schooling, and medical care. I have found that parents appreciate help in the area of education and do not feel that the grandparents have infringed upon their responsibility to provide for their own children.
Here are a few guidelines for large gifts:
First, grandparents should not constantly remind the parents, grandchildren, or others of what they have done. In some cases, grandparents use gifts as leverage to get the parents or grandchildren to behave a certain way, which makes the recipients feel beholden to the grandparents.
Second, grandparents’ motivation to do something for the grandchildren should never be as punishment to their own children, the parents. Skipping a generation can create problems between each generation. This is another reason why giving the money to the parents is better.
Third, when funding a college education, the amount should be such that, with standard assumptions on earnings and education costs, the majority of the funds will be used up by the time the grandchildren finish college. Receiving a significant amount of money after college could instill complacency, resulting in a poor work ethic.
Finally, trusts or custodial accounts for grandchildren should only be funded if the parents do not need the funds themselves. It can be very frustrating for parents to watch significant sums of money accumulate in their children’s education accounts while the parents’ goals and desires go unmet.
In some situations the grandparents do not trust their children, and as a result they feel they must take care of their grandchildren. This thinking usually creates more problems between the parents and grandparents.
Also, while some tax benefits can be derived from giving gifts to grandchildren, these benefits are secondary. The most important consideration for grandparents in making any gift is the potential impact on the grandchildren and on their relationship with their own children.
So what should you do to leave a lasting legacy for your grandchildren? Check back next time for recommendations on how to use your estate wisely.
At Ronald Blue Trust, we believe there is a bigger picture when it comes to wealth. To learn more about how you can integrate biblical wisdom with your financial planning, or for more information on Russ Crosson’s book,
Your Life…Well Spent
, please contact a Ronald Blue Trust advisor, call us at 800.987.2987, or email
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