Deciding whether or not to leave money and/or gifts to grandchildren and if so, how much and how to do it, is a very common question during estate planning. There is certainly no problem in making a gift to grandchildren in your Will but there are a number of choices that need to be made, particularly where the grandchildren are young. However, some of the choices are also relevant to grandchildren who are teenagers and young adults.
What if I leave an amount of money to each grandchild?
The first issue that always arises is to consider whether the grandchild is under the age of 18 years. If they are still a minor child, then generally grandparents are not going to want the grandchild to receive and access the money, possibly not until they are more mature.
If the grandchild is over the age of 18 years, then the choice to give the grandchild the money directly is obviously easier. But the question still arises as to when a grandparent considers that their grandchild is mature enough to receive their inheritance. As the Will-maker, you can decide at what age your grandchildren will have access to their inheritance, although there are some issues with that dealt with below.
What options are there to provide for a grandchild under 18 years?
The options generally are to:
have a simple provision for the executor to hold the funds on trust until the grandchild attains the age of 18 years; or
make provision enabling the executor to pay the funds to the parent of the child and for the parent to then be responsible to pass it on to their child at an appropriate time; or
have the funds held in a trust such that the grandchild receives the funds when the trustee of the trust considers that they are mature enough to deal with it.
Each of these options have some benefits and some disadvantages. We address these in more detail below.
Can my Will just leave some money to hold on trust until my grandchild reaches 18 years?
The simple answer is yes.
But, although it seems fairly straightforward, there are some issues to consider:
The executor would need to hold the funds until the child turns 18. That may mean putting the funds into a bank account so as to earn some interest. Depending on the amount, the executor might consider investing the money in, for example, shares but that then puts an onus on the executor to invest someone else's money wisely.
If the funds are put into a bank account, or any other financial investment, a tax file number will need to be provided. Otherwise withholding tax will be taken from interest or income earned. The tax file number would normally be applied for by the executor and be specifically for the funds that the executor holds for the child.
If it is intended to provide funds for numerous grandchildren, then this simple provision would require the executor to set up a bank account for each grandchild. It is not appropriate under succession law to have one account for multiple grandchildren as the executor is obliged to account to each grandchild for their share of the inheritance when they reach 18 and they will not all reach 18 at the same time.
The executor would have an ongoing responsibility to:
deal with the interest or income earned on the investment for tax purposes;
identify when the grandchild attains the age of 18 years; and
ensure that the funds are delivered to that grandchild.
Although this is a simple provision, there are the issues of dealing with the funds and also a common wish of grandparents that the grandchild only receive the money when they are more mature – and that is often seen as being older than just 18 years.
By virtue of an old English case that still applies today, even though you might provide that the grandchild not receive the funds until the age of 25 years, the grandchild may still be able to call it at the age of 18 years. Using a trust (see below) can be beneficial in limiting that happening.
Can I leave the inheritance for my grandchild with their parent to hold until they turn 18?
This depends on the amount of the inheritance that might be provided to a grandchild. If it is a modest amount, it may not be worthwhile for your executor to hold the inheritance on trust until the grandchild reaches the age of 18 years.
So, if it is modest, a very simple arrangement is to allow the executor to give the money to the parent of the grandchild so that the parent takes responsibility to provide those funds to their child once the child attains the age of 18 years.
Risks of parents holding the inheritance for grandchildren
The concerns that a grandparent may have using this method is whether their child does actually provide those funds to their own child (the grandchild) upon attaining 18 years. It also relies upon a moral trust that the grandchild’s parents will act properly in managing those funds, ensuring they keep those funds clearly separated from their own money.
Where the grandchild is near the age of 18 years, and the intention is that the grandchild receive the money at that age, this type of provision is reasonable. But where the amount of money involved is large and the child is quite young, the concern may be that the parent mixes the inheritance with their own money and by the time the grandchild reaches 18 years, the amount might be "lost" or at the least, significantly depleted.
Another concern would be that the parent goes through a marital breakdown with the issue that the parent would need to prove that the funds were an inheritance to be held for the grandchild and not a gift to the parent.
A further concern could be that the parent falls upon difficult financial times and either uses the inheritance for their own purposes (possibly with the intent to re-pay prior to the grandchild turning 18) or unwittingly allows the inheritance to be exposed to claims by creditors.
In summary, gifting the inheritance to the parent of the grandchild can work but there are a number of potential drawbacks.
Should my grandchildren’s inheritance be held in a testamentary trust?
The trustee may hold all of the funds in one single trust for the benefit of all of the grandchildren;
The trustee has the discretion as to when each grandchild may receive any income or a share of the capital of the trust;
In exercising that discretion, the trustee does not have to make the distribution of income equally among all the grandchildren and nor does the distribution of capital need to be equal among all of the grandchildren. This may be beneficial if the needs of some grandchildren are greater than those of the other grandchildren;
The trustee can decide when the grandchild is mature enough, and when it is safe enough, to provide any substantial payment out of the trust. For instance, although it may be considered that at age 25 the grandchild would be mature enough, what if the grandchild was then in with a bad crowd or they were going through a relationship breakdown or they had substantial debts? If that was the case, the trustee may want to delay providing the funds to that grandchild until their situation improves;
The trustee only needs to obtain one tax file number and file one tax return annually in respect of the earnings or income of the trust.
You do need to carefully determine who the trustee should be. This is particularly important if the grandchildren are very young as the trustee may have a long period in which to manage the trust.
You may want to give some guidelines to the trustee as to how you expect the trustee to act including:
when you believe the grandchildren should receive their share of the trust;
in what ratio they receive it; and
other criteria they should have such as completing tertiary education or becoming financially independent before receiving it.
Your guidelines would not be binding on the trustee but it would at least give the trustee an understanding of your wishes as to when and how your grandchildren should benefit from the trust monies.
A testamentary trust for grandchildren is a very effective way of protecting the money for their future benefit whilst providing plenty of flexibility.
What about having an education trust for the grandchildren?
The use of a testamentary trust for grandchildren certainly has a lot of benefits and flexibility. You may want to consider putting some parameters around the trust such as having it only available to pay for the education of the grandchildren?
We have frequently been asked this question which really borders upon considering the moral aspects as compared to the legal aspects. Morally, there is a lot to be said for grandparents supporting the education of their grandchildren. Legally, you do need to be aware of the potential issues in that regard as well as the tax consequences.
The moral aspects of creating an education trust
Looking from the moral perspective, the provision of funds to pay for education is commendable although how that applies in a practical sense needs to be considered.
If there are multiple grandchildren, will the expectation be that the trustee provides an equal value for the education of each grandchild?
If the intention was that it be an equal value for each grandchild, how do you address the situation where one grandchild may go on to university whereas another may leave school early? For the early leaver, do they get the balance of their share from the trust after allowing for what has already been paid for their education or do they lose that entitlement?
Should the trust only be there to support high school and tertiary education or should it consider, for example, vocational education?
How do you deal with a grandchild of limited academic capability either due to incapacity, whether mental or physical, or illness?
Apart from paying education expenses, should the trustee also be able to pay for other expenses such as to buy a car for the grandchild to get to university? Or fund an overseas trip for a field study or to gain further education in an overseas university or tertiary institution?
The legal aspects of creating an education trust
From a legal perspective, depending on the size of the trust and the number of grandchildren, the operation of the trust may involve considerable time being spent by the trustee on certain tasks including:
considering the investment of the funds which may involve getting financial advisers in place;
considering how each grandchild is going each year in their continuing education;
dealing with the relevant education body to arrange payments of fees and so on;
ensuring that the trust distributes the income each year to minimise the impact of tax. This would possibly include considering the taxable income being earned by the grandchild too; and
dealing with the final winding up of the trust once it has expended all the funds or all the grandchildren have completed their education.
As a parent, all these issues are a day-to-day task of bringing up children. For someone else to do this, as trustee for the grandchildren can be quite an imposition, particularly if the appointed trustee is not part of the whole family. And in that case, should the trustee be paid for doing that work?
A trust for the education of grandchildren is a very worthwhile cause but there does need to be careful thought given to how it should work and the practical implications of operating it.
Many grandparents will leave money or gifts to their grandchildren, either in their Will or via a testamentary trust. You do, however, need to consider a number of issues (or potential issues) to ensure that your intentions are actually able to be realised in a practical and cost-effective manner.
If you’re considering making an allocation for your grandchildren but would like guidance and advice on the best options for your specific circumstances, please contact our estate planning team to arrange a meeting.
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