Grandma wants to skip generation with inheritance

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Grandma wants to skip generation with inheritance

Post by BlackStrat » Mon Feb 10, 2020 9:43 am

I received an unusual question from a friend who knows I enjoy investments and personal finance.

Background:
His 88 year-old mother wants to leave whatever is left of her estate to her 18 year-old granddaughter (and skip her 2 children). Her current net worth is around $800k but she's getting ready to enter an assisted living facility. Her yearly income (pensions & IRA RMD) are about $77k so she's close to covering living expenses until she enters nursing care when she'll need to draw from her portfolio. Barring unforeseen medical expenses, there should be something left when she passes.

I did a quick review online and discovered the GST (Generation Skipping Transfer) trust. However it appears to be designed for high net worth people as it's irrevocable and it appears that once the trust is funded, even his grandmother wouldn't be able to access the funds.

My friend is also worried about his daughter getting a large sum of money (could still be close to $800k if his mother were to pass earlier than later) in the next year or so at such a young age.

Another option discussed was for the grandmother to simply pass the estate to her son and for him to distribute it (serve as a trustee) to his daughter when he sees fit. However, he's worried about tax ramifications to him and his wife over that timeframe.

Question:

Is there an option for smaller estates such as this to satisfy this request?

Living Free
Posts: 414
Joined: Thu Jul 19, 2018 7:31 pm

Re: Grandma wants to skip generation with inheritance

Post by Living Free » Mon Feb 10, 2020 9:47 am

BlackStrat wrote:
Mon Feb 10, 2020 9:43 am


Another option discussed was for the grandmother to simply pass the estate to her son and for him to distribute it (serve as a trustee) to his daughter when he sees fit.

Do you mean for the grandmother to pass the estate to a trust for which the son would be the trustee and the granddaughter would be the beneficiary?

Or just give it to the son who could give it to the granddaughter as he sees fit. This amount of money is well under the estate tax limit.

bluebolt
Posts: 1102
Joined: Sat Jan 14, 2017 9:01 am

Re: Grandma wants to skip generation with inheritance

Post by bluebolt » Mon Feb 10, 2020 9:48 am

Serving as a trustee and inheriting the money are two different things that seem to be conflated as options.

In either case, unless he lives in a state with an inheritance tax, there's probably not much to worry about tax-wise.

His mother should speak to an estate attorney who can lay out the options.

A trust with the son as the trustee seems like a reasonable thing to do, but without the details, a little hard to know.

student
Posts: 4635
Joined: Fri Apr 03, 2015 6:58 am

Re: Grandma wants to skip generation with inheritance

Post by student » Mon Feb 10, 2020 9:49 am

I agree with the other responses. Maybe read up on articles such as https://blog.ehdhestateplanning.com/201 ... grave.html but the best thing is to talk to an estate attorney.

User avatar
Watty
Posts: 18756
Joined: Wed Oct 10, 2007 3:55 pm

Re: Grandma wants to skip generation with inheritance

Post by Watty » Mon Feb 10, 2020 9:58 am

It really is not clear just what she is trying to accomplish by this since she she does not have enough assets (like $11 million) that estate taxes would have to be paid.

The RMD rules were recently changed so that you can no longer do a stretch IRA since whoever she leaves an IRA to will need to withdraw all the money within ten years.

She might also be thinking about trying to tie up her money in a trust so that medicaid would pay for her nursing home but that is also tricky and should have been done years ago.

Depending on the age of her kids it is also possible that more grandkids could still be born.

With $800K she really needs to have professional estate planning if she wants to try anything fancy or it could backfire on her. There are elder care lawyers that specialize in issues like this.

Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Re: Grandma wants to skip generation with inheritance

Post by BlackStrat » Mon Feb 10, 2020 10:11 am

OP here - thx for the responses.

They haven't thought this out. It's simply the grandma expressing a desire to leave everything to the granddaughter.

To avoid the complications (and expense) of a trust, he said they mentioned her simply willing the estate to him (and excluding his sibling) with the understanding that he would pass on the funds to the granddaughter when appropriate (no trust involved). However if he were to invest $800k and wait 20 years to pass it on, we're talking pretty large tax ramifications over that time with capital gains and dividends which would complicate his tax returns.

No other grandchildren will be involved as both immediate heirs are nearing 60.

User avatar
Stinky
Posts: 3464
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Grandma wants to skip generation with inheritance

Post by Stinky » Mon Feb 10, 2020 10:17 am

A key question is whether the two children, and especially the son, are happy with being “skipped” in favor of the granddaughter. I can imagine some real complications if the son inherits the money, but then doesn’t follow grandma’s wishes to pass it on to granddaughter.

I’d definitely get an estate attorney involved, who can ascertain what grandma’s desires are and set up the legal structure to make it happen.
Last edited by Stinky on Mon Feb 10, 2020 10:17 am, edited 1 time in total.
It's a GREAT day to be alive - Travis Tritt

User avatar
Sandtrap
Posts: 9861
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Grandma wants to skip generation with inheritance

Post by Sandtrap » Mon Feb 10, 2020 10:17 am

Seek legal counsel.
j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

User avatar
JoeRetire
Posts: 5147
Joined: Tue Jan 16, 2018 2:44 pm

Re: Grandma wants to skip generation with inheritance

Post by JoeRetire » Mon Feb 10, 2020 10:19 am

BlackStrat wrote:
Mon Feb 10, 2020 9:43 am
His 88 year-old mother wants to leave whatever is left of her estate to her 18 year-old granddaughter (and skip her 2 children).
Why?
Is this the only grandchild?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Re: Grandma wants to skip generation with inheritance

Post by BlackStrat » Mon Feb 10, 2020 10:20 am

Stinky wrote:
Mon Feb 10, 2020 10:17 am
A key question is whether the two children, and especially the son, are happy with being “skipped” in favor of the granddaughter. I can imagine some real complications if the son inherits the money, but then doesn’t follow grandma’s wishes to pass it on to granddaughter.

I’d definitely get an estate attorney involved, who can ascertain what grandma’s desires are and set up the legal structure to make it happen.
Bingo!

I agree - the thought makes me shudder.

Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Re: Grandma wants to skip generation with inheritance

Post by BlackStrat » Mon Feb 10, 2020 10:21 am

JoeRetire wrote:
Mon Feb 10, 2020 10:19 am
BlackStrat wrote:
Mon Feb 10, 2020 9:43 am
His 88 year-old mother wants to leave whatever is left of her estate to her 18 year-old granddaughter (and skip her 2 children).
Why?
Is this the only grandchild?
I believe so. No idea why she wants to skip her kids - that's a family dynamic of which I'm not aware.

Jack FFR1846
Posts: 11319
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Grandma wants to skip generation with inheritance

Post by Jack FFR1846 » Mon Feb 10, 2020 10:21 am

BlackStrat wrote:
Mon Feb 10, 2020 10:11 am

To avoid the complications (and expense) of a trust, he said they mentioned her simply willing the estate to him (and excluding his sibling) with the understanding that he would pass on the funds to the granddaughter when appropriate (no trust involved).
Translation: She wills to him with HER understanding that he'll give it to the grand daughter, but in reality, he'll go out and buy a Lamborghini and travel the country with it.

If she really wants it going to the grand daughter, expecting someone to do something not legally required is naive.
Bogle: Smart Beta is stupid

Leesbro63
Posts: 6297
Joined: Mon Nov 08, 2010 4:36 pm

Re: Grandma wants to skip generation with inheritance

Post by Leesbro63 » Mon Feb 10, 2020 10:26 am

There’s a big risk that 88 year old grandmother’s childless child is gonna hate his/her brother and niece.

Spirit Rider
Posts: 12633
Joined: Fri Mar 02, 2007 2:39 pm

Re: Grandma wants to skip generation with inheritance

Post by Spirit Rider » Mon Feb 10, 2020 10:27 am

With assets this small, there is no reason to use a GST or any other irrevocable trust.

The easiest choice is to leave the assets in the will to the granddaughter in a UTMA with the son as custodian. Most states allow a UTMA termination age of 21, with nine (9) states and counting allowing the election of up to age 25.

Other options are to name a living trust or testamentary trust in the will with the granddaughter as beneficiary and the son as trustee.

A irrevocable Medicaid trust would not work well with assisted living costs and there is a five-year claw-back.

If the grandmother really wants the money to go to the granddaughter, it should not be left to the son. Depending on the family dynamics, a co-trustee or third party trustee may be advisable.

In many circumstances, the children are quite well off and grandparents don't see any need to leave them significant money.

cjclueless
Posts: 25
Joined: Fri Dec 06, 2013 12:18 pm

Re: Grandma wants to skip generation with inheritance

Post by cjclueless » Mon Feb 10, 2020 10:28 am

Sounds messy! You also mentioned she is taking RMDs at this time from an IRA. If in fact she wills the IRA to the son, then he is on the hook for either continuing RMDs (at his tax rate/situation) and/or making sure it gets drained and taxed within 10 years. RMDs could cease for 10 years but that could be a big tax hit in the year the account is emptied.

User avatar
Watty
Posts: 18756
Joined: Wed Oct 10, 2007 3:55 pm

Re: Grandma wants to skip generation with inheritance

Post by Watty » Mon Feb 10, 2020 10:31 am

BlackStrat wrote:
Mon Feb 10, 2020 10:11 am
To avoid the complications (and expense) of a trust, he said they mentioned her simply willing the estate to him (and excluding his sibling) with the understanding that he would pass on the funds to the granddaughter when appropriate (no trust involved). However if he were to invest $800k and wait 20 years to pass it on, we're talking pretty large tax ramifications over that time with capital gains and dividends which would complicate his tax returns.
A trust is not that hard or expensive to set up.

Even if everyone is OK with trying to do this things can be messy if "he" (the father of the grandkid?)

1) Dies and his spouse inherits it.
2) Has to take RMDs from the inherited IRA and deplete it in 10 years
3) Gets sued
4) Has to pay taxes on it each year.
5) Fill out college financial aid statements
6) Has huge medical expenses
7) Granddaughter dies
etc

bsteiner
Posts: 4663
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Grandma wants to skip generation with inheritance

Post by bsteiner » Mon Feb 10, 2020 10:36 am

This is by no means unusual. Her Will can provide for the grandchild in trust. She can select the grandchild's parent who's a child as trustee, with the grandchild's other parent and her other child as successor trustees or co-trustees. If the grandchild's parent(s) are the trustee(s), they're unlikely to take commissions (fees).

There are some special rules for trusts that receive IRA benefits.
Watty wrote:
Mon Feb 10, 2020 9:58 am
...
With $800K she really needs to have professional estate planning if she wants to try anything fancy or it could backfire on her. There are elder care lawyers that specialize in issues like this.
A trusts and estates lawyer would probably be better for this since it's a trusts and estates matter.

retiringwhen
Posts: 1697
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Grandma wants to skip generation with inheritance

Post by retiringwhen » Mon Feb 10, 2020 10:47 am

There is a lot of speculation and complication in the earlier answers.

I am going to make two assumptions.
- The Grandmother really wants the give the money to her grand daughter and not include any other potential heirs (especially if that is her explicit desire).
- The Father will follow explicit legal requirements.

If those two assumptions hold. All she needs to do is update her will to make her grand daughter her heir. End of story (she is 18 and of legal age and can inherit directly).

Now, one more assumption, the Grandmother is agreement that it is not in the best interest of the grand daughter to immediately have unfettered access to the inheritance.

If that is true, she just needs to have the will drafted such that the grand daughter receives the bequest as the SOLE beneficiary of a trust account with someone like her father as trustee. I would suggest a trust with either a set date for turning over control to the daughter at a pre-arranged age (e.g. 25 or 30) or via a competence test that is well documented in the trust language in the will to protect and direct the trustee in the event the granddaughter does not "mature".

A competent lawyer could easily put something like this together. bsteiner and others have described these in detail in the past here.

Getting involved in understandings, intentions, etc. are just trouble.

edit: bsteiner just answered in a lot less words what I wanted to say :-)

JGoneRiding
Posts: 1906
Joined: Tue Jul 15, 2014 3:26 pm

Re: Grandma wants to skip generation with inheritance

Post by JGoneRiding » Mon Feb 10, 2020 10:56 am

BlackStrat wrote:
Mon Feb 10, 2020 10:20 am
Stinky wrote:
Mon Feb 10, 2020 10:17 am
A key question is whether the two children, and especially the son, are happy with being “skipped” in favor of the granddaughter. I can imagine some real complications if the son inherits the money, but then doesn’t follow grandma’s wishes to pass it on to granddaughter.

I’d definitely get an estate attorney involved, who can ascertain what grandma’s desires are and set up the legal structure to make it happen.
Bingo!

I agree - the thought makes me shudder.
Trusts run by family for thr benefit of their own children are NOT that expensive. It's when you need a seperate outside person to control them because family can't be trusted (no pun intended) or because there isnt family to do it. Contact an independent financial planner and ask if they will act as controller/investor of the funds. Or contact Schwab/ vanguard (they charge less but this might be tp small for them, but if they are just holding the funds might be ok) then set up a standard hcem trust for the grandchild with dad as trustee with someone else as secondary trustee to be in effect until Dgd is 35 then she can control her own trust with a co trustee or if it is small potatoes she can just have it

My own family gma had a cool mil. Most of my life my mom and other aunt were talking about inheritance. Gma paid a good chunk of my education. Gma will be a 100 next month. The money lasted until 99! Now she is on Medicaid. I am the only one that got a substantial inheritance. Everyone better learn to take care of themselves. So for sure dont tell the grandkid.

User avatar
Watty
Posts: 18756
Joined: Wed Oct 10, 2007 3:55 pm

Re: Grandma wants to skip generation with inheritance

Post by Watty » Mon Feb 10, 2020 11:03 am

bsteiner wrote:
Mon Feb 10, 2020 10:36 am
This is by no means unusual. Her Will can provide for the grandchild in trust. She can select the grandchild's parent who's a child as trustee, with the grandchild's other parent and her other child as successor trustees or co-trustees. If the grandchild's parent(s) are the trustee(s), they're unlikely to take commissions (fees).

There are some special rules for trusts that receive IRA benefits.
Watty wrote:
Mon Feb 10, 2020 9:58 am
...
With $800K she really needs to have professional estate planning if she wants to try anything fancy or it could backfire on her. There are elder care lawyers that specialize in issues like this.
A trusts and estates lawyer would probably be better for this since it's a trusts and estates matter.
Note to the OP.

If you have not followed these boards you may not realize that bsteiner is every knowlable in these matters and his or her comments should stand out from all the other suggestions you are getting.

aristotelian
Posts: 7000
Joined: Wed Jan 11, 2017 8:05 pm

Re: Grandma wants to skip generation with inheritance

Post by aristotelian » Mon Feb 10, 2020 11:52 am

529 account for a portion of the funds would be another possibility to consider.

Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Re: Grandma wants to skip generation with inheritance

Post by BlackStrat » Mon Feb 10, 2020 1:12 pm

thanks to all for some great input; I'll advise friend about options with suggestion to contact estate attorney.

Capsu78
Posts: 318
Joined: Wed May 18, 2016 10:30 am

Re: Grandma wants to skip generation with inheritance

Post by Capsu78 » Mon Feb 10, 2020 3:24 pm

Just for reference, here is a 5 year long active thread with inheritance horror stories that I follow just to keep myself comfortable and grounded with mine and DW's end of life plans:

https://forum.mrmoneymustache.com/antim ... es-wanted/

Grt2bOutdoors
Posts: 22230
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Grandma wants to skip generation with inheritance

Post by Grt2bOutdoors » Mon Feb 10, 2020 4:51 pm

Jack FFR1846 wrote:
Mon Feb 10, 2020 10:21 am
BlackStrat wrote:
Mon Feb 10, 2020 10:11 am

To avoid the complications (and expense) of a trust, he said they mentioned her simply willing the estate to him (and excluding his sibling) with the understanding that he would pass on the funds to the granddaughter when appropriate (no trust involved).
Translation: She wills to him with HER understanding that he'll give it to the grand daughter, but in reality, he'll go out and buy a Lamborghini and travel the country with it.

If she really wants it going to the grand daughter, expecting someone to do something not legally required is naive.
Besides that, the son can now do whatever he wants with the money. He's under no legal requirement to leave any of the money to the granddaughter. Unless the monies are in a trust, they may be exposed to the son's creditors, ex-wife, children, any unknown offspring, etc. No way, would I suggest anyone doing what the OP posted. There's a saying: penny wise, pound foolish. This is it, in spades! You can save $5K now and fritter away $800K+ tomorrow. Sound like a fair exchange? I thought so.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Re: Grandma wants to skip generation with inheritance

Post by BlackStrat » Tue Feb 11, 2020 9:09 am

you're absolutely right and I came to that conclusion early on - this should be done legitimately via an estate attorney.

If the grandmother survives for years and ends up in nursing care, her portfolio may be depleted quickly and it will all be moot.

Capsu78 - those ARE some horror stories! Like passing an accident, it was hard to look away!

dknightd
Posts: 2164
Joined: Wed Mar 07, 2018 11:57 am

Re: Grandma wants to skip generation with inheritance

Post by dknightd » Tue Feb 11, 2020 9:20 am

As you have already determined this is a case where Grandma needs to meet with a lawyer, assuming she is still of sound mind. There are too many contingencies. One is Grandma could outlive granddaughter.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

prairieman
Posts: 215
Joined: Thu Mar 01, 2018 3:17 pm

Re: Grandma wants to skip generation with inheritance

Post by prairieman » Tue Feb 11, 2020 10:47 am

An important component of this discussion could involve the tax status of the first generation children. If they will likely eventually pay an inheritance tax (state or federal), then the their children would benefit by inheriting from grandma directly and it would come at a time when they could use it more. Grandma could arrange to pass it to her children and the children could reject the inheritance and let it pass to their children (if so desired). I think some of that could happen in my own family since we are in a state with estate taxes.

michaeljc70
Posts: 6406
Joined: Thu Oct 15, 2015 3:53 pm

Re: Grandma wants to skip generation with inheritance

Post by michaeljc70 » Tue Feb 11, 2020 11:05 am

I don't have anything to add, but at age 88 and entering assisted living, I wouldn't slow walk this.

Leesbro63
Posts: 6297
Joined: Mon Nov 08, 2010 4:36 pm

Re: Grandma wants to skip generation with inheritance

Post by Leesbro63 » Tue Feb 11, 2020 11:28 am

prairieman wrote:
Tue Feb 11, 2020 10:47 am
An important component of this discussion could involve the tax status of the first generation children. If they will likely eventually pay an inheritance tax (state or federal), then the their children would benefit by inheriting from grandma directly and it would come at a time when they could use it more. Grandma could arrange to pass it to her children and the children could reject the inheritance and let it pass to their children (if so desired). I think some of that could happen in my own family since we are in a state with estate taxes.
And something to consider is that the estate tax exemption halves to about $5,700,000 under current legislation, in 2026. There's lots of chatter of making that even lower...although let's not get into that. But the actionable point is that a middle aged person today could be subject to Federal estate tax that they did not expect.

NotWhoYouThink
Posts: 2912
Joined: Fri Dec 26, 2014 4:19 pm

Re: Grandma wants to skip generation with inheritance

Post by NotWhoYouThink » Thu Feb 13, 2020 6:13 pm

Capsu78 wrote:
Mon Feb 10, 2020 3:24 pm
Just for reference, here is a 5 year long active thread with inheritance horror stories that I follow just to keep myself comfortable and grounded with mine and DW's end of life plans:

https://forum.mrmoneymustache.com/antim ... es-wanted/
This thread made me appreciate the bogleheads forum because -
- the mods here make sure posters stay civil and non-political
- the mods here get threads back on track when they stray too far afield
- the posters here are incredibly well informed and helpful, so misunderstandings about the duties of executors and trustees get corrected quickly and kindly

But it is a fascinating thread, and reminds me that families are crazy everywhere.

Topic Author
BlackStrat
Posts: 309
Joined: Wed Apr 29, 2015 9:20 am

Re: Grandma wants to skip generation with inheritance

Post by BlackStrat » Mon Feb 17, 2020 9:24 pm

michaeljc70 wrote:
Tue Feb 11, 2020 11:05 am
I don't have anything to add, but at age 88 and entering assisted living, I wouldn't slow walk this.
Horrible update: my friends mother died suddenly with no will or legal document signed in time.

Unladen_Swallow
Posts: 756
Joined: Tue Dec 10, 2019 6:12 pm

Re: Grandma wants to skip generation with inheritance

Post by Unladen_Swallow » Mon Feb 17, 2020 9:35 pm

BlackStrat wrote:
Mon Feb 17, 2020 9:24 pm
michaeljc70 wrote:
Tue Feb 11, 2020 11:05 am
I don't have anything to add, but at age 88 and entering assisted living, I wouldn't slow walk this.
Horrible update: my friends mother died suddenly with no will or legal document signed in time.
Oh dear. I'm sorry.

Now it plays out as it plays out. I would hope both children will follow through with their mothers wishes. That would be the right thing.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

Post Reply