How to give money to grandchildren

Most grandparents enjoy giving money or gifts to grandchildren. And some even choose to skip over more financially secure adult children and provide directly for the younger generation.

Some grandparents do this because they worry about their children’s marriages. If a child remarries, a grandparent may want his estate to go directly to his grandchildren, beyond the reach of a child’s new spouse.

The options

Grandparents must decide whether they want to provide benefits now, in the future, or both. Most people make relatively modest gifts over the course of their lifetimes, and leave more substantial gifts in their wills.

There are tax consequences if a grandparent gives certain property during his lifetime. If capital property (stocks, bonds or a cottage) is gifted, the law considers the grandparent to have sold the asset at fair market value, and requires the grandparent pay taxes on any increase in value since he bought the property.

There are also income attribution rules, which state the income (but not the capital gains) on property transferred or loaned, directly or indirectly, to a related minor child (grandchildren, nieces, nephews, etc.) goes back to the transferor or lender for tax purposes. These rules can be punitive, and often tilt the balance in favour of deferred giving.

For example, say you transfer $50,000 in stock shares, which you originally purchased for $30,000, to your grandchild on her 15th birthday. You would report a capital gain of $20,000 on that transfer. Your granddaughter would report any future gain. But, any dividend income would be attributed back to you, and you would have to report it on your tax return until your grandchild turns 18.

Testamentary gifts

Using a will to benefit grandchildren is the preferred approach for most grandparents. There are fewer uncertainties, since the grandparent may not know what he can comfortably afford to give away while he’s alive. And, the income attribution rules no longer apply.

But, there are other factors to consider.

1. Age of the grandchildren

The age and life stage of the grandchild plays into which giving strategy works best, including whether the gift should be made outright, or through a trust. For instance, a grandchild who is an infant when the will is prepared (and should probably receive the gift in a trust) may be an adult when his grandparent dies (and can likely accept the gift outright).

2. Number of grandchildren

Grandparents should also think about grandchildren not yet born, and whether any potential step-grandchildren are to benefit. If the number of grandchildren is unlikely to grow, a grandparent may opt for a set cash legacy in the will.

But exercise caution if more grandchildren are likely; otherwise, additional bequests could drain the estate. For instance, say your will provides $25,000 to each grandchild. There might be two grandchildren when you write the will, but by the time you die, there may be six. That’s an additional $100,000.

A safer course might be to divide a lump sum (or share of the estate’s residue) amongst all grandchildren. Or, you could provide separate pots for each family: $100,000 to be divided among your daughter’s children; and $100,000 to be divided among your son’s children.

If one family is larger, though, this can produce uneven benefits among the cousins.

3. Should the benefit be outright or in trust?

If your grandchildren are minors when you die, a trust is required. In the case of modest legacies (say, less than $25,000), a clause letting the executor pay the fund to the grandchild’s parents should suffice. But if the inheritance is substantial, a trust or trusts are preferred.

4. Other trust considerations

Trusts let a testator establish how and when the money is used. Trusts can be fixed (all income and/or capital is to paid at a fixed time, or times) or discretionary (funds are only paid for certain purposes, or under certain circumstances).

Trusts can also be used to provide incentives. For instance, the trust could be structured so funds are only paid if and when a grandchild attends or completes university. In such cases, the will needs to say what happens if the conditions aren’t met.

5. Fairness

Regardless of how you structure gifts, you must decide whether each grandchild gets the same amount, or if the benefits will be customized to each grandchild’s needs.

6. What about the children?

And you need to decide whether to skip over the children, or benefit both generations. If you choose the former, talk to your kids to minimize misunderstandings later.

And sometimes you can’t legally bypass a child. In all provinces, parents have an obligation to provide for dependant children. In B.C., someone writing a will runs the risk that even a non-dependant child could challenge that will.

7. Should the grandchildren be contingent beneficiaries?

Even if grandchildren aren’t listed as primary beneficiaries, it’s common for grandchildren to be mentioned in wills as contingent beneficiaries. So the children are the primary beneficiaries, but if they predecease their parent (the testator), then their share will be divided among the grandchildren.

Updated Nov. 22, 2016.