How to give money to grandchildren

It’s not unusual for grandparents to want to give money or gifts to grandchildren.

And as the Canadian population ages, you may find more clients choosing to skip over their adult, and more financially secure, children in order to provide for the younger generation.

Grandparents may also be concerned about the marital stability of their children. If a child remarries, clients may want their estates to go to their grandchildren, beyond the reach of a child’s new spouse. Here’s how to help these clients.

The options

Your client needs to decide whether he wants to provide the benefit now, in the future or both. For most people, relatively modest gifts are made during the course of their lifetimes. More substantial gifts are generally left via will. Testamentary gifting is tax-efficient and ensures the benefit is received when most needed. It also offers great flexibility. And, as long as the grandparent remains mentally capable, he’ll be able to alter the plan if circumstances change.

If your client wishes to gift cash or other property during his lifetime, warn him about potential tax consequences. If capital property (e.g., securities, a cottage) is gifted, the grandparent is deemed to have disposed of the asset at fair market value, and must pay tax on any gain.

Read: When your client wants to change beneficiaries

Also take into account income attribution rules. These rules state that income (but not capital gains) on property transferred or loaned, directly or indirectly, to a related minor child (e.g., grandchildren, nieces and nephews) is attributed back to the transferor or lender. These rules can be punitive, and often tilt the balance in favour of deferred giving.

For example, say your client transfers $50,000 in cash and shares with a market value of $50,000 and an adjusted cost base of $30,000 to her grandchild on her 15th birthday. Your client would report a capital gain of $20,000 on the transfer of the shares. The grandchild would report any future gain. But, any dividend income from the shares, and any income earned on the $50,000, would be attributed back to your client. Your client must report the dividend and other income as long as the grandchild is under the age of 18 at the end of the year.

Income attribution would not apply if the transfer was made to an adult grandchild.

Testamentary gifts

Providing a benefit to grandchildren via a will is the preferred approach for many grandparents, as doing so has many benefits. That’s because there are fewer uncertainties, since the client may not currently know what he can comfortably afford to give away. Also, the income attribution rules no longer apply.

But, there are other factors grandparents must consider.

Read: When a client might cut off an adult child

1. Age of the grandchildren

The current age and stage of life of the grandchild will impact the appropriate giving strategy, including whether the gift should be made outright, or via trust. But we don’t know what the future holds. 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 passes away (and can likely accept the gift outright). Still, a client should prepare a will that works now, basing it on the current age of the grandchild. He can update it later.

2. How many grandchildren are there?

Not only should your client consider the current number of grandchildren, he should also think about potential future grandchildren and, given the prevalence of blended families, whether any potential step-grandchildren are to benefit as well. If the number of grandchildren is unlikely to grow, the client may wish to provide a set cash legacy in his will.

But exercise caution if additional grandchildren are likely; otherwise, additional bequests could drain the client’s estate. For instance, say your client’s will states he’ll provide $25,000 to each grandchild. There might only be two grandchildren when he creates his will, but by the time the client dies, he could have six. That’s an additional $100,000.

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

Needless to say, this may produce uneven benefits between the cousins. Whenever beneficiaries are referenced in terms of a relationship to the testator (grandchild, niece, nephew, etc.), as opposed to by name, careful drafting is essential to clarify whom is to be included.

Read: Client collapses trust to fund daughter’s education

3. Should the benefit be outright or in trust?

The ages of the grandchildren and the amounts involved will, in large part, drive this decision. For instance, if they’re minors at the time of the grandparents’ death, a trust is required. In the case of modest legacies (less than $25,000, for instance), a clause empowering the executor to pay the fund to the parents of the grandchild should suffice. But if the inheritance is more substantial, a trust or trusts are preferred for both younger and more mature grandchildren.

4. Other trust considerations

Although certain income tax benefits are disappearing for testamentary trusts, they still offer numerous advantages. Trusts allow a testator to 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 that funds are paid only if and when the grandchild attends or completes college or university. Whenever conditions, like age and/or achieving a particular goal, are attached to a gift, it’s crucial that the will state what happens to the funds if the conditions aren’t met. Otherwise, that situation could result in partial intestacy or a legal battle.

Read: 3 tricky trust rules

5. How can the client be fair?

Whether gifts are provided outright or via trust, your client needs to decide whether he wants to provide the same benefit to each grandchild, or a customized benefit that takes into account each grandchild’s circumstances.

6. What about the children?

Does your client want to skip over his children, or does he plan on benefitting both generations? If children are excluded, does your client plan on seeking input or buy-in from his children? Communicating such matters during the planning stage will help avoid or minimize conflict and misunderstandings down the road.

Your client should be aware that, in certain situations, bypassing a child may not be a viable option. In all provinces, parents have a legal obligation to provide for dependant children. In B.C., a testator runs the risk that even a non-dependant child could challenge the will.

Read: The importance of post-mortem planning

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.

This means that the children are the primary beneficiaries, but if the children predecease their parent (the testator), then their share will be divided between the grandchildren. Often, contingent clauses are inserted as afterthoughts, and do nothing more than substitute the grandchildren for their parents.

So, ensure the document is well-drafted. The factors and variables set out in this article (fixed or discretionary; age thresholds) should be reflected in the contingent gift clause as well.

Elaine Blades is a Toronto-based trust and estate professional.