Welcoming a grandchild into your life is one of the most exciting milestones you can experience. Along with this joy, many grandparents begin thinking about how to secure a bright future for their growing family. This post outlines how an estate plan can help you meet this goal.
Protecting your legacy with a will and trust
A will allows you to specify exactly who receives your probate assets after you pass away. This means deciding what portion of your estate you would like to leave to your grandchildren. You should also know that the contents of your will generally do not override beneficiary designations on assets such as life insurance policies or retirement accounts.
Without a will, California’s intestacy laws determine the division of your probate assets. This may not align with your wishes, especially if you want to include grandchildren in your plans.
Shaping your grandchildren’s inheritance with a trust
A revocable living trust offers additional flexibility and allows you to set conditions on when and how your grandchildren receive their inheritance. When you properly fund the trust, meaning you have transferred legal ownership of your assets to the arrangement, it can help your family avoid probate, saving time and reducing legal costs for your loved ones.
Supporting custodial accounts
Custodial accounts offer another way for you to contribute to your grandchild’s future. These accounts allow you to set aside funds that your grandchild can access when they reach a specified age.
California’s Uniform Transfers to Minors Act (UTMA) allows you to transfer assets such as cash, stocks or real estate to a minor. For standard lifetime gifts, you may delay the child’s access to the funds until they turn 21. If you make the transfer through a will or trust, you can extend this age to 25.
Similarly, 529 college savings plans provide tax-advantaged growth for education costs. You can use these funds to pay for tuition, books and even certain registered apprenticeship programs.
While federal law allows you to use 529 funds for K-12 tuition tax-free, California does not conform to this rule. Withdrawals for K-12 tuition may be subject to state income taxes and a 2.5% penalty on the earnings.
Planning for a grandchild with disabilities
If your grandchild has a disability, careful planning becomes even more essential. Certain government benefits, such as Supplemental Security Income (SSI) and Medi-Cal, have strict income and asset limits. A direct inheritance could unintentionally disqualify your grandchild from receiving these services.
A special needs trust lets you provide for your grandchild without affecting their eligibility for public benefits. It can cover extra costs that government programs do not fully pay for, such as medical treatments, education, recreation and other quality-of-life expenses. Due to the complex nature of these agreements, an attorney often assists in creating the draft so it complies with regulations.
The California ABLE Act Board administers the CalABLE program, which provides another option for families. Eligible individuals with disabilities can put money into a tax-advantaged account with much higher limits than regular bank accounts.