I often receive calls from clients excitedly telling me they have a new grandchild.
After some congratulatory comments and discussing the details (gender, weight, birthdate, how over the moon the parents and grandparents are), the conversation generally turns to whether the grandparents’ estate plan needs updating.
And I must give the dreaded lawyer answer, “It depends.”
Does your trust already include grandkids?
If you have a well drafted living trust, it likely included your grandchildren before their birth.
A typical trust would provide for a share going to each living child and a share to the descendants of any pre-deceased child. Thus, if your child who just gave you a grandchild should happen to pass before you, their share would go to their child(ren).
If the trust is very well drafted, it will also have a provision that says, in essence, “but please hold it in trust until my grandchild is old enough to handle assets” (and you would have decided on that age — 25 years old, for example).
Your trust may state “…to my descendants” followed by the “term per stirpes” or by representation.
These are the terms that provide for your lineal descendants, including shares for grandchildren if a child should pre-decease. If instead your trust says, “To my son, John, and if he should pre-decease me, then to my daughter, Sarah,” or some other named person, and now your intent is that John’s child(ren) receive his share, you will need to update your trust.
Making a gift to grandkids separately
If you wish to include that new grandchild in your trust such that they receive a share separate from anything going to your children, you’ll likely need to revise your trust.
And hey, I get it, that baby is cute, they have yet to talk back to you, and it’s not you they’re keeping up at night. But there are some choices to be made as to how best to accomplish your gifting goals.
If you were to leave a cash gift in trust to Gabby Granddaughter, that would work so long as you had provisions for how and when Gabby Granddaughter receives the funds.
Typically, the trust would provide that trust assets can be used for the beneficiary’s health, education, maintenance and support (“HEMS” to acronym-loving lawyers).
You can be as specific as you’d like regarding distributions, so long as you don’t violate public policy.
For example, a clause saying “so long as Gabby never marries,” would likely be declared void, as would “provided Gabby cuts off contact with her father, my annoying son-in-law.”
More than one grandchild
In the above example, because Gabby was named specifically, if another grandchild comes along, you’d have to again amend your trust to make another cash gift to that equally adorable grandchild.
Instead, consider a provision that gives a dollar amount or percentage of assets to each of your then living grandchildren.
For example, your trust could leave 10% of trust assets to be distributed in equal shares among all your then living grandchildren. Shares for beneficiaries under a designated age would remain in trust until they reached such age.
Even more grandchildren
For larger gifts, consider leaving a “grandchildren’s trust” that can benefit all grandchildren born up until a certain date (e.g., 20 years after your death), at which time the trust will divide into separate shares for each grandchild.
Or, as long as certain tax rules are followed, the trust could continue on for generations for the benefit of your descendants, whenever born, on an “as needed” basis or for specific purposes (e.g., funding college educations).
More children than others
This is often the real crux of the matter.
If Child 1 has no children, Child 2 has two children, and Child 3 has five children, deciding what’s “fair” can be difficult.
If your trust provides that 15% will be set aside for a grandchildren’s trust, Child 1 may feel like they just gave up 5% of their inheritance for the benefit of their siblings’ kids (each child’s inheritance would have been reduced by 5% to provide for the grandchildren’s share).
And if that 15% is divided equally among the seven grandchildren, Child 3’s branch of the family is, at least in theory, making out better than the others.
You could instead say that the 15% will go to the grandchildren by right of representation, which would mean that half of that 15% would go to Child 2’s two children and half would go to Child 3’s children. That still won’t solve Child 1’s grudge, though.
Another alternative then is to divide the entire trust by the number of children you have, with some portion of each share benefiting the child and their own children.
At the death of a child, what remains is distributed in equal shares among their own children. For a child who has no children, the trust could provide that what remains will be distributed in equal shares to your grandchildren (once again, you’d have to decide: half to Child 2’s two children, or two-sevenths?).
In essence, you’re deciding if you’re counting heads or counting branches of the family tree.
Congratulations on the new addition to the family. Who knew such a blessing could bring such math problems!
Just keep in mind, the decision is yours to make. Your trust is your legacy and an expression of your values. Equal is not always fair and fair is not always equal.
And who knows, maybe your other kids are perfectly happy to see their nieces or nephews receive an inheritance from you. There’s more to talk about at the next family dinner.
Teresa J. Rhyne is an attorney practicing estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I).” You can reach her at Teresa@trlawgroup.net