Legal Tip 220: Bypassing Children to Benefit Grandchildren on your Death

Some people see no reason to leave their estate to their adult children, and so want to bypass them to benefit their grandchildren.

I have had clients like this whose adult children are all on high paying salaries and have loads of assets. They, as grandparents, want to benefit their grandkids directly.


This is possible, as there is no compulsion about having to gift to your children. Get legal advice the potential for a family provision claim though.


The best way to do it though is via a testamentary discretionary trust (TDT). This allows both flexibility as well as asset protection, but the real benefit is the tax savings as each minor could earn about $20,000 per year and not pay any tax.


I think to make things fair one trust per grandchild should generally be set up, but with the option for the executor to combine trusts perhaps.

Each adult child (parent of the grandchild) could be the trustee and they could invest the money and then apply the income to the support of the children’s education and perhaps living expenses.


At a certain point you can allow the grandchild to take over, perhaps when they are 30 years old. They could then keep the trust going, hopefully, or might vest it and take the capital out.


Example

Grandpa Simpson is rich. He also realises that he hasn’t go that long left so he goes to a lawyer to amend his will.

Grandpa considers his son Homer, to be the kind of person that would waste or blow any inheritance within a few years. If this were to happen the 3 grandkids would miss out on benefitting from the wealth built up over the years.

So, Grandpa bypasses Homer completely and leaves 1/3 to each grandchild under a testamentary trust. He was unsure whether to have Homer as the trustee or not because he cannot be trustee with finances, so he has Homer and 2 other relatives appointed as trustee.

The will is structured so that the proceeds will be invested and then that income can pass to the children until they reach the age of 25 and then they can take the capital of the trust or leave it to keep going.

The child’s income can be used by the parents for the child’s living expenses and education benefits.

Grandpa dies and the trust comes into play with the investments generating $60,000 pa which works out to be $20,000 per grandchild. No tax is payable on this income.

Homer is indirectly benefiting though as he has his children’s living expenses fully paid for so is using less of his own cash. In fact, Homer’s serviceability also improves as his living expenses go down.

 

One trust per beneficiary is best to avoid arguments, though you have to keep the assets equal until the beneficiaries take control.

 

It depends. This is something that each family would need specific advice on. There are arguments for separate or combined trusts.

Since these trusts are established under a will it is easy to make the assets of each equal.

 

Thinking afterwards. Eg will is set up when the two grandchildren are 5 years old. Youd want the trusts to still have roughly the same amount when they are 30.

 

Yes that is a point. Unless perhaps they children had different needs and one was needing more expenses paid than the other.

If the both trusts had the same assets withdrawal rates there would probably be no issue.

 

Beneficiary Controlled Testamentary Trusts is one approach I gather.

 

That is how I structure most wills, unless there is an issue with the testator not wanting to pass control until a later age such as 25 or so.

Keep in mind a minor cannot be a trustee or an appointor until they reach the age of 18.

 

Thanks for that about minors.

I went with an "age-discrimination" as well. Have to put the boot in somehow. Let 'em make mistakes with their own dosh first and hopefully they'll learn but I'll not know if they do obviously.