Ways to Leave Assets to Grandchildren

The Generation-Skipping Transfer Tax — What You Need to Know

When you transfer assets to grandchildren (or other beneficiaries more than one generation below you), the generation-skipping transfer (GST) tax may apply:

• The GST tax rate is 40% — the same as the federal estate tax rate
• Each person has a GST exemption of $13.61 million (2024, indexed for inflation) — the same as the federal estate tax exemption
• Most families don't owe GST tax because the exemption is large enough to cover most estates
• Annual exclusion gifts don't count toward the GST exemption — you can give each grandchild $18,000/year (2024) without using any exemption
• Direct skip transfers (directly to grandchildren) and transfers to generation-skipping trusts both use the GST exemption

Leaving Assets to Minor Grandchildren — Special Considerations

Minor grandchildren cannot directly receive significant inheritances — a court conservatorship is required unless a trust or UTMA account is in place:

• A trust is almost always preferable to a conservatorship. Court-supervised conservatorship is expensive, public, inflexible, and terminates when the minor turns 18 — delivering a potentially large sum to a teenager with no restrictions.
• The trust can hold assets until any age you specify. Rather than delivering $200,000 to an 18-year-old, a trust can hold and manage the funds until 25, 30, or older — with distributions for specific purposes (education, housing, health) in the interim.
• UTMA accounts are simpler but deliver funds at majority. If the state-mandated age is 18 or 21, that's when the grandchild receives full control — whether or not they're ready for that responsibility.
• Name a reliable custodian or trustee. For minor grandchildren, the person managing the funds matters enormously. Choose someone who will genuinely act in the grandchild's best interest — not necessarily the child's parent, if family dynamics suggest otherwise.

Coordinating Grandchildren's Inheritances With Children's Inheritances

When leaving assets to both children and grandchildren, coordination matters:

• Decide whether grandchildren receive in addition to or instead of children. A per stirpes provision handles the "instead of" scenario automatically. Naming grandchildren as additional beneficiaries requires explicit trust language specifying the amounts or percentages.
• Consider the impact on your children. If you leave significant assets directly to grandchildren, your children may feel bypassed — particularly if the grandchildren are the children of one sibling but not others. Consider whether the overall distribution feels fair to all family members.
• Coordinate with your children's plans. If your children are themselves creating trusts for their children (your grandchildren), leaving assets directly to grandchildren may create redundant or conflicting structures. Coordination across generations produces cleaner outcomes.
• Consider 529s during your lifetime. Funding 529 accounts for grandchildren during your lifetime — rather than through your estate — allows you to see the benefit, potentially reduces your taxable estate, and provides a dedicated, tax-advantaged education fund that doesn't compete with other inheritance distributions.

Common Mistakes

• Naming minor grandchildren as direct beneficiaries without a trust. Without a trust or UTMA account, any bequest to a minor requires court-supervised conservatorship — expensive, public, and ending at 18 with an outright lump sum to the minor.
• Using a UTMA account for large bequests. UTMA accounts deliver funds at the state's age of majority — often 18 or 21. A trust with a later distribution age and specific purposes is much more appropriate for significant amounts.
• Not using per stirpes language in the trust. Without per stirpes, if one of your children predeceases you, their share may pass to surviving children rather than to their children (your grandchildren). Per stirpes ensures the family branch is preserved.
• Not coordinating GST exemption allocation with the estate plan. For larger estates, failing to allocate the GST exemption to generation-skipping transfers can result in avoidable 40% tax on transfers to grandchildren. GST planning requires deliberate attention in the estate planning process.
• Funding grandchildren's inheritances without considering the parents' feelings. Parents may feel hurt if significant assets go directly to their children rather than through them. Communication about your intentions — and why — reduces the potential for family conflict.

Real-Life Example