Putting money in a trust for grandchildren provides significantly more control, asset protection, and tax advantages compared to a standard savings account. Trusts allow you to dictate exactly when and how funds are used—such as for education or at specific ages—while shielding the money from lawsuits, creditors, or a beneficiary's divorce.
Trusts are good for larger amounts, such as estate planning, insurance payouts, etc. if you want to leave a chunk of your estate to your grandchild, that is the way to go. A trust is only as good as it's structure and trustees. Basically, you need a ranked list of people that you have complete trust in.
Long-Term Growth Potential: Trust funds can be structured to include various investments like stocks, bonds, and mutual funds, which can offer a higher growth potential compared to savings accounts.
Where to store savings for grandchildren
Options for saving and investing for your grandchildren
You can gift a grandchild up to the annual gift tax exclusion amount (around $19,000 per person in 2025/2026) without any tax implications or reporting; gifts exceeding this amount must be reported on a gift tax return (Form 709) but only count against your substantial lifetime gift tax exemption (nearly $14 million in 2025), meaning you likely won't pay tax until you've given away massive sums over your lifetime. Married couples can combine their exclusions to give double.
The "5 by 5 rule" (or "5 and 5 power") in trusts allows a beneficiary to withdraw the greater of $5,000 or 5% of the trust's annual fair market value, whichever is higher, without triggering significant tax consequences, offering flexibility while preserving the trust's long-term integrity for the grantor's original purpose. If unused, the right lapses, but repeated lapses can have tax implications, so it's a strategic clause for asset management and tax planning.
Suze Orman, the popular financial guru, goes so far as to say that “everyone” needs a revocable living trust. But what everyone really needs is some good advice. Living trusts can be useful in limited circumstances, but most of us should sit down with an independent planner to decide whether a living trust is suitable.
You can gift a grandchild up to the annual gift tax exclusion amount (around $19,000 per person in 2025/2026) without any tax implications or reporting; gifts exceeding this amount must be reported on a gift tax return (Form 709) but only count against your substantial lifetime gift tax exemption (nearly $14 million in 2025), meaning you likely won't pay tax until you've given away massive sums over your lifetime. Married couples can combine their exclusions to give double.
Parents sometimes make the mistake of choosing trustees on the basis of family relationships or personal friendships. That is not to say family and friends aren't good trustees - they often are - but rather, you should consider their relationship to your children, and whether you would trust them to manage your money.
Yes, you can likely give your daughter $50,000 tax-free by using your annual gift exclusion and lifetime exemption, but you'll need to file Form 709 with the IRS to report the gift exceeding the annual limit ($19,000 in 2024/2025). The $50,000 gift reduces your large lifetime exemption (over $13 million in 2024/2025), meaning you won't pay tax on it unless your total lifetime gifts exceed that huge amount; your daughter never pays gift tax on the money.
Taking both 7 year periods together means that you need to know how much of the NRB has been used on chargeable transfers ('chargeable' gifts) for up to 14 years before death. This is what's known as the 14 year shadow (or sometimes the 14 year rule).
Custodial accounts (UGMA/UTMA)
Along with cash deposits, a custodial account can hold everything from stocks and bonds to annuities and real estate. Once the grandchild reaches the age of majority, they'll take full ownership of the money and/or assets within the account.
Tax-efficient options for investing for grandchildren
Junior ISA (JISA) - A Junior ISA is one of the most popular ways of saving money for grandchildren. These accounts offer tax-free growth, meaning any interest or gains are not subject to capital gains tax (CGT).
State-administered 529 education savings plans are the go-to choice for many families, and their generous tax benefits are a big reason why. The money your grandchild withdraws for qualified education expenses — including private K-12 education expenses — is completely tax-free.
If your estate is large and complex, a trust could be your best bet. But if your estate is smaller and fairly simple, a will is likely the best option.
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The "5 and 5 rule," or 5 by 5 power, in trusts allows a beneficiary to withdraw the greater of $5,000 or 5% of the trust's value annually, offering flexibility for beneficiaries while providing tax and asset protection benefits, as the unused portion can lapse without being taxed as part of the beneficiary's estate, preventing unintended estate inclusion. It's a common trust provision that balances limited access for beneficiaries (e.g., for health or education) with the grantor's long-term asset control goals, preventing the beneficiary from having too much control (a "general power of appointment") that triggers taxes, say experts at The Werner Law Firm.