One of the most preferred ways to leave assets to grandchildren is by naming them as a beneficiary in your will or trust. As the grantor or trustor, you are able to specify a set amount of money or a percentage of your total accounts and property to each grandchild as you see fit.
Another way to make tax-free gifts is to make direct payment for a child's or grandchild's medical or educational expenses. Payments made directly to a medical services provider (e.g., doctor, hospital) or to an educational institution for tuition are not treated as taxable gifts.
A family pot trust for all of your descendants.
If you have a large family and want to give discretion to your trustee for distribution of assets, a family pot trust may work for your needs.
Give cash
You may give up to $15,000 a year to each grandchild in 2021 without having to report the gifts or being affected by any federal tax consequences. For married couples, that holds true for each partner. And they can give that amount to as many grandkids as they want.
A trust with basic investment assets such as shares, managed funds or investment properties may cost under between $1,500 and $2,500 per year, whereas a larger and more complex trust with more assets may cost between $3,000 and $5,000 per year.
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule. If you die within 7 years of giving a gift and there's Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.
If you don't want to invest specifically for college, you can open a brokerage account for the benefit of your grandchild. These accounts are known as UTMA or UGMA accounts and allow you to maintain control of them until your grandkid reaches a certain age – generally 18 or 21.
So, how much can you gift to your grandchildren tax-free? Each grandparent can gift up to £3,000 in any one tax year, exempt from IHT. If the whole £3,000 is not used in any single tax year, the balance can be carried forward to the next tax year.
Opening a savings account for an infant grandchild gives you 18 to 21 years to make deposits to support their future needs and dreams. Most banks allow grandparents to start and control a minor child's savings account until they reach adulthood.
Buying your grandchild a U.S. saving bond is considered a safe investment because it is guaranteed by the government of the United States. Savings bonds also are advantageous because you don't have to pay local and state taxes on any interest earned.
With that said, revocable trusts, irrevocable trusts, and asset protection trusts are among some of the most common types to consider. Not only that, but these trusts offer long-term benefits that can strengthen your estate plan and successfully protect your assets.
So transferring assets to a family trust can make life much easier for your family in this way. You can use an irrevocable family trust to insulate assets from creditors. Most importantly, a family trust can help to minimize estate taxes once the trust grantor passes away.
To set up your trust in a way that establishes these certainties beyond dispute, you will need the help of a legal expert – ideally a solicitor with knowledge of legal, financial and tax matters.
Economically there is no difference between the two. And as a practical matter, even inheritance taxes are generally paid by the executor of the estate before assets are distributed to beneficiaries.
What Is Considered a Large Inheritance? There are varying sizes of inheritances, but a general rule of thumb is $100,000 or more is considered a large inheritance. Receiving such a substantial sum of money can potentially feel intimidating, particularly if you've never previously had to manage that kind of money.
Under current law, the parent has a lifetime limit of gifts equal to $11,700,000. The federal estate tax laws provide that a person can give up to that amount during their lifetime or die with an estate worth up to $11,700,000 and not pay any estate taxes.
So if you and your spouse have two grandchildren, both of you can gift $14,000 to each child for a total amount in tax-free gifts of $56,000. And remember, these are tax-free gifts above and beyond the $5.43 million exemption limit.
If you're looking for how to pass money to heirs tax free, that may be accomplished by converting traditional accounts to Roth accounts. The converted amount is subject to regular income taxes, but withdrawals – either by you or your heirs – are tax free.
For 2018, 2019, 2020 and 2021, the annual exclusion is $15,000. For 2022, the annual exclusion is $16,000.