ESTATE PLANNING FOR GRANDCHILDREN
by: Begley Law Group
by Thomas D. Begley, Jr., CELA
A grandparent-grandchild relationship is a special one. Perhaps because of the differences in age, or perhaps because grandparents have already raised one child or a family of children, they have a different viewpoint with respect to their grandchildren. Grandparents often have the following concerns:
- Pocket Money. They want grandchildren to have sufficient pocket money to enjoy the little things in life.
- College Education. They want grandchildren to receive a college education without incurring enormous student loan debt.
- They want their grandchildren to be able to own a car.
- They want their grandchildren to be able to buy a home.
- They want their grandchildren to be able to start a business, if appropriate.
A number of tools are available to address these issues, these tools can be used in combination with each other.
- Grandparents can gift each grandchild up to $15,000 per year by taking advantage of the annual exclusion gifts under the Federal Gift Tax law. Gifts for college education are exempt regardless of amount as long as the payment is made directly to the educational institution. Gifts for medical care are also exempt so long as payment is directly to the provider.
- Specific Bequest in Will or Trust. A will or trust can provide that each grandchild receive a small, but fixed amount. These amounts may be $1,000, $5,000, $10,000, $25,000, or $50,000, depending on the size of the estate of the grandparents and the number of grandchildren. Again, depending on the size of the estate, the number of grandchildren and the amount of the bequest, each grandparent can leave a specific bequest or it could be deferred until the death of the surviving grandparent.
- Percentage Share of Estate. A grandparent’s will or trust can provide that the grandchildren receive a percentage share of the grandparent’s total estate. Typically this is done on the death of the survivor of the two grandparents. Often one equal share of the estate is set aside for each child and one separate equal share is divided equally among the grandchildren. Sometimes each child and grandchild receive separate equal shares. Monies can be left outright to the grandchildren if they are old enough or can be held in trust. A trustee is authorized to use the money for the grandchild’s health, education, maintenance, support, buy home or start a business. The trustee may be the grandchild’s parents. The variation is to have one trust to be divided equally among all grandchildren.
- Problem Grandchildren. Grandparents tend to love all their grandchildren, but they recognize that some may have problems with drugs, alcohol, or criminal behavior. A provision can be made in wills and trusts to provide for these grandchildren.
- Grandchildren Needing Incentives. Some grandchildren, lovable as they may be, are lazy. Grandparents may devise trusts to provide incentives for these grandchildren to achieve certain goals. College graduation and attaining a job paying a certain basic annual salary are examples.
- 529 Plan. A grandparent may establish or contribute to a 529 Plan already established by a parent. These plans are an excellent way to provide for college education expenses.
- Coverdell Education Savings Account. A grandparent can establish or contribute to a Coverdell education savings account.
- 2503(c) Trust. A 2503(c) Trust can be established by a grandparent for the benefit of a grandchild.
Under a 2503(b) Trust, transfers are made to a trust utilizing the gift tax annual exclusion. To qualify for the gift tax annual exclusion, the beneficiary’s interest must be a “present” interest. The beneficiary’s income interest in the trust qualifies for the annual exclusion if the income is distributable currently to the beneficiary, to a custodian for a minor beneficiary under the Uniform Transfers to Minor’s Act or the Uniform Gifts to Minor’s Act, or to a guardian for the minor beneficiary. Typically the beneficiary of a 2503(b) Trust is given the noncumulative power to withdraw an amount each year equal to the trust’s net income for the year. The beneficiary is given a Crummey power of withdrawal. The assets can be held in trust for the benefit of the grandchildren for a period of time designated by the grantor.
2503 (c) Trusts
Under a 2503(c) Trust (also called a “Minor’s Trust”), the gift tax annual exclusion can be utilized. As long as the beneficiary of the trust is under age 21, the gift will be treated as a “present interest” if the following requirements are satisfied.
- The trustee has the power to use the gift property and income for the benefit of the minor before the minor reaches age 21.
- The minor has the right to withdraw income and principal at age 21.
- If the minor dies prior to age 21, the income and principal is paid to the minor’s estate or to persons selected by the minor by exercising a general power of appointment.
The key to using a 2503(c) Trust is that there must be no substantial restriction on the exercise of the trustee’s discretion to make distributions. If the trustee’s discretion is limited to education, this would be a “substantial restriction.” On the other hand, if the trustee is able to make distributions for the minor’s support, this would not be a “substantial restriction.” A restriction on the exercise of discretion greater than that imposed on a guardian results in a denial of the annual exclusion.
A 2503(c) Trust may continue beyond age 21 if the trust beneficiary is given a 60-day Crummey withdrawal right.
Gifts under the Uniform Transfers to Minors Act (UTMA) also qualify for the gift tax annual exclusion. These gifts are irrevocable because a custodian must be selected and a successor may be designated. The major drawback is that the assets in the custodian account must be paid over to the minor at majority or at age 21, depending on state law. If the donor is also custodian, then the assets in the custodian account are included in the donor’s estate.
 I.R.C. §2503; Rev. Proc. 2019-44(3)(.43)(1).
 I.R.C. §2503(b).
 Rev. Rul. 58-242, 1958-1 C.B. 251.
 Jacob Konner, 35 T.C. 727 (1961).
 Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968); Rev. Rul. 73-405, 1973-2 C.B. 321.
 Treas. Reg. §25.2503-4(b)(1).
 Illinois Nat’l Bank v. United States, 756 F. Supp. 1117 (C.D. Ill. 1991).
 Heidrich v. Comm’r, 55 T.C. 746 (1971).
 Rev. Rul. 69-345, 1969-1 C.B. 226.
 Rev. Rul. 74-43, 1974-1 C.B. 285; Priv. Ltr. Rul. 8817037 (Apr. 29, 1988) and Rev. Rul. 81-7, 1981-1 C.B. 474.
 UTMA §20.