Many factors come into play when responding to these questions. We will try to deal with some of them and client concerns in this newsletter.

Tax Issues. Some of the tax issues that come to mind are:

1) GST Tax. Will there be a Generation Skipping Transfer Tax (GST Tax) problem? As the title implies, the GST Tax typically would be levied on transfers to grandchildren or great grandchildren in excess of the exemption. ( Now the same as the lifetime federal estate tax exemption of $2.0 million per grandparent.)

2) Will there be an estate tax and if so, where will the burden of that tax fall? Are there specific assets such as IRA’s that the client wishes to leave to grandchildren?

We will deal with the IRA issues briefly below. Assuming that there are satisfactory answers to the first two questions, then the mechanics of a provision for grandchildren have to be considered.

Form of Gift. A gift to grandchildren (or great grandchildren) is usually in the form of a specific dollar amount or a percentage of assets. Of course, if a percentage is used, the trust should spell out what assets are taken into account in determining the percentage. Also, a valuation date has to be selected where a portion of assets is carved out for grandchildren. The simplest designation is a dollar amount (sometimes referred to as "pecuniary" amount).

If a client is concerned that assets may be depleted for client living expenses and care so that there may not be enough funds left over for children, the grandchild gifts are sometimes a pecuniary amount limited by a percentage. Here again, we have to draft these provisions carefully to make sure that the client’s intentions are carried out and that the successor trustee has clear instructions.

Outright or Trust. The next consideration is whether the gifts to grandchildren are outright, or held in trust. The gift can be outright if the grandchild is of age, or to a custodian, if under 21, pursuant to the Uniform Transfers to Minors Act. Gifts are generally held in trust where significant amounts are involved and where a client wishes to delay distributions until the grandchild reaches a certain age. (We are not dealing here with the more complicated "Dynasty Trust" which involves significant wealth and multi-generational trusts.)

When Is the Grandchild Entitled to the Gift? Generally, a trust for a grandchild provides for mandatory distributions at a certain age. Usually, a grandparent will select an age at which the grandchild is considered to be financially responsible and mature. Depending on the individual family and the amounts involved, these ages of mandatory distributions usually range from age 25 to age 40, often with staggered mandatory distributions. In considering these mandatory distribution ages, we ask clients to think about the amounts involved and the administration of the trust so that high trust administration fees, in relation to the amount of the trust, can be avoided.

What Is Distributable? Grandparents generally want the trustee to be able to distribute funds for education, health, support and maintenance. Often, more liberal distribution provisions are included such as funds to purchase a house or invest in a business. Sometimes there are limitations based on the grandchild’s gainful employment or other standards of conduct that the grandparent feels are important.

Who Is the Trustee? Where a trust is designed to last for a period of years, the selection of a trustee is important. Our observation is that individual family members are usually not equipped by experience, professional training or available time to act as a trustee over a period of years. We recommend flexibility so that a corporate co-trustee can be appointed, and in some cases permit the grandchild to choose a corporate trustee where administration is most convenient. For example, if a grandchild lives in California, a trust administered in Michigan may be inconvenient and expensive. The desire for flexibility has to be balanced against a grandparent’s wishes, of course. A grandparent may prefer a particular corporate trustee or have specific ideas about how a trustee is chosen or removed after the grandparents have died.

What About IRA’s? We use the term IRA to cover any retirement plan benefit. Most commonly, clients with corporate retirement benefits, profit sharing or 401K plans have rolled those into IRA’s during their lifetimes because of the flexibility offered by an IRA. Therefore, we will use the term "IRA" to refer to any retirement plan benefit.

Naming a grandchild as a beneficiary of an IRA has the advantage of a "stretch". This means the grandchild can use his or her life expectancy to take required minimum distributions of IRA assets. Sometimes clients are attracted to this alternative because of the long deferral of income taxes. However, in some cases, the grandparent is concerned that the grandchild might withdraw the entire account and spend the money frivolously.

That leads to a discussion of a "forced" stretch. This is where the complicated subject of trusts as IRA beneficiaries comes up. In order to force the stretch, or avoid complete withdrawal of the funds by the grandchild/beneficiary, a trustee can hold the account for the grandchild’s benefit. Trusts as IRA beneficiaries are a complicated subject and will not be dealt with in detail in here. It is enough to say that the trust which holds an IRA account has to be carefully drafted to avoid bad income tax results and accomplish the grandparent’s objectives of avoiding a frivolous spend down of the IRA funds. (Estate taxes as well as income taxes can play a big part in designing the grandchild’s trust in these circumstances.)

Conclusion. Financial advisors and CPA’s may have occasions to consult with clients concerning gifts to grandchildren that take place after death. We will be happy to meet with any clients who have need of professional consultation in crafting gifts to grandchildren or other matters concerning their estate plans. If so, please contact Jim Modrall or any of the other attorneys listed below.