How to Leave an Inheritance to Your Grandchildren

Grandparent and child fishing on a pier

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As you plan for your estate, you’ll likely consider your children, but what if you’d also like to include grandchildren—even if they haven’t been born yet? Are there tax-efficient and considerate strategies for passing down your wealth and property without worrying about your hard-earned funds being spent on frivolous items?

“We all want to be remembered, and an inheritance creates another connection to your grandchildren, whether you’re giving money and a head start, or a prized collection of baseball cards,” Jeffrey Asher, an estate planning attorney working in New York and Connecticut told The Balance.

To provide your grandchildren with an inheritance, consider how you want to create those memories—and plan your inheritance carefully. Learn about an inheritance’s promises and pitfalls, the best ways to leave money to grandchildren, and how to prepare your grandchildren for one.

Key Takeaways

  • If your estate exceeds federal estate tax exemptions or incurs state inheritance or estate taxes, an estate planning lawyer or tax professional can help you set up the inheritances in the most tax-efficient way.
  • Various vehicles exist to leave an inheritance to grandchildren, including trusts, wills, custodial accounts, and account transfers. Choosing from these methods may require the expertise of an estate attorney.
  • Prepare your grandchildren for their inheritance by discussing your plans, setting expectations, and asking for input.

What to Consider With Inheritances

One of the central issues for any inheritance is whether your estate could exceed the federal estate tax exclusions or be subject to state estate taxes. As of 2021, the federal estate tax exclusion for your total estate was $11.7 million per person. The exclusion increases to $12.06 million in 2022. It's important to know that the exclusion amount may be temporary, because it was set by the 2017 Tax Cuts and Job Act and could revert to the previous limit of $5 million, adjusted for inflation, in 2026. New federal legislation could also lower the estate tax exclusion at any time.

If the total gifts you give during your lifetime and your estate together are worth less than $11.7 million ($12.06 million in 2022) before 2026 are not subject to state estate taxes, minimizing estate taxes won’t be your central concern. However, you’ll still need to ensure that you’ve left clear legal instructions on assets and gifts intended for your grandchildren.


If your estate is more than $11.7 million ($12.06 million in 2022), not only will estate taxes be levied, but direct estate gifts to grandchildren may incur the generation-skipping transfer tax, another whopping 40% in taxes.

Some states also charge estate and inheritance taxes for grandchildren who receive estate assets, no matter the estate’s size. For example, Pennsylvania charges a 4.5% tax on assets received by direct descendants and lineal heirs. Some states, such as Iowa, base inheritance taxes on the share of the estate or the right to receive the amount—and the recipient is responsible for the taxes—although property passed to a surviving spouse and lineal descendants, including children and grandchildren, is exempt.

In other states, such as New Jersey, grandchildren may face an inheritance tax for amounts larger than $675,000. Due to these differences, consulting with an estate lawyer in your state is critical.

The Best Ways to Leave Money to Grandchildren

The best way to leave money to your grandchildren depends on your circumstances and the size of your estate, Asher said. There are a few different ways to go about leaving an inheritance to grandchildren.


A will identifies the grandchildren you’re leaving assets to and your intended distribution of those assets. A will can be the instrument you use to divvy up your baseball-card collection or jewelry among grandchildren. However, a will alone doesn’t always provide for a trust’s specific financial instructions, probate avoidance, and taxes. You also might not be able to pass some property to minor grandchildren through a will alone and would need to consult with a lawyer for the proper strategy.


Within a will, a lawyer can create a simple trust. You’ll appoint a trustee to hold and manage your grandchild’s estate portion that you want to protect in trust when you pass away. The trustee ensures that funds are used by the grandchild or for the grandchild’s benefit as intended.

If you don’t create a trust, any funds you leave to your grandchildren are overseen by the child’s parents or guardians until they turn 18 or adulthood (per state), then given to the child.


A trust distributes your assets after you pass away while allowing you to have more control over how funds are used. For example, you can set up a trust that distributes your gifts over a period of years or as the grandchild ages (for example, apportioning a gift at ages 20, 25, and 28), or for specific purposes (for example, education, a wedding, or a first house). There are various ways a trust can be set up, including irrevocable trusts and revocable trusts.

A trust is only as good as the lawyer (and possibly, tax advisor) who drafted it. State law can impact how trusts function and how taxes are collected on them—even if some grandchildren live in other states. A trust can be expensive to set up, so if you’re leaving a smaller amount (for example, a few thousand dollars) to heirs, you might want to consider another approach.

Custodial Accounts

A Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account allows a grandparent to give stocks, bonds, and other securities to grandchildren. The account also acts as the custodian of those funds until the child becomes an adult, according to individual state law. However, the grandchild can take possession of the gifts within these custodial accounts as soon as allowed by state law, and you have no control over how the funds will be used. These accounts are subject to taxes on capital gains, interest, and dividends.

Investment, Retirement, and Bank Account Transfers

Bank and investment accounts can be transferred to a grandchild upon your death. They are a simple solution if you don’t need to divide a complex estate among grandchildren or only plan to gift a smaller amount. You can also leave the contents of your IRA or other retirement accounts to a grandchild, although doing so could result in estate taxes and depends on the tax laws in your state.


A transfer-on-death plan can override a will, trust, or other estate planning vehicles.

Establishing a beneficiary is often as easy as filling out an online form where you’ll name each grandchild and apportion percentages of the account. Even if you're planning to leave funds to children, it’s also possible to designate the distribution method as “per stirpes,” the legal term indicating that you want your assets to pass equally to each branch of your descendants.

Educational Savings Accounts and Retirement Plans

These college savings accounts in a grandchild’s name allow grandparents to gift college-earmarked funds before death that grow tax-deferred in investments. Grandchildren can withdraw funds tax-free as long as they use the contents for higher-education purposes. Two popular accounts types are 529 plans: a prepaid tuition plan and an education savings plan, both run by state agencies. Coverdell savings accounts are another vehicle, although not as popular.

You can boost a grandchild’s future golden years by establishing a retirement plan in their name. For example, as long as a grandchild has earned some income in the year, you may be able to contribute to their Roth IRA, which offers tax-free withdrawals at age 59 1/2  or if they experience a disability.


Remember that gifts to your grandchild’s accounts during your lifetime are subject to state gift taxes. They are also added to your total $11.7 million ($12.06 million in 2022) lifetime exclusion that includes your estate.

Preparing Your Grandchildren for Their Inheritance

The element of surprise isn’t ideal when it comes to inheritances, Asher said. “The last legacy you want to leave behind is a broken family” by creating resentment due to improper planning; for example, leaving one grandchild the successful family business because they expressed a passing interest, and leaving cash to another grandchild.

After your passing, one grandchild might acknowledge that they aren’t interested in business ownership, and the other grandchild might feel shorted by cash versus a long-term investment that makes millions over decades. Furthermore, grandchildren and your children (their parents) might argue over the inheritance.

Call a meeting to discuss your plans—even if your family doesn’t usually talk about money—to share your goals and ask for ideas. Describe how you’d like any money to be used (for example, for college, a first home, or a future wedding). Most grandparents don’t want to see hard-earned money spent on a sports car or European vacation.

Even if you plan to leave a smaller amount or only contribute to an educational account, make your intentions clear; for example, perhaps you expect a grandchild to achieve a certain grade point average (GPA) in high school, use the funds for graduate school, or finish college in a certain amount of time.

You’ll also want to discuss any potential tax implications or ask your grandchildren to consult with a tax advisor. For example, your grandchildren may owe capital gains tax upon selling investments transferred into their name, or need to file tax waivers or fill out paperwork to benefit from a stepped-up tax basis for certain inherited account types.

The Bottom Line

If you’re hoping to care for your lineage through an inheritance, consult with a professional who can help you assess your circumstances and estate, but don’t forget to consider your grandchild’s needs and desires as part of the process. Help them understand your intentions when you leave them cash, stocks, property, or other assets. A thoughtful and transparent plan will help you avoid post-mortem conflict, confusion, and stress among the people you are trying to help.

Frequently Asked Questions (FAQs)

Do grandchildren usually get an inheritance?

Many grandparents try to pass down generational wealth, but not everyone can set aside enough money to do so, and the money might not go directly to the grandchildren. The Federal Reserve studies inheritances as part of its Survey of Consumer Finances. When a household has at least one parent with a college degree, the Federal Reserve found it has a 27% chance of receiving an inheritance. When the household doesn't have a parent with a college degree, that average drops to roughly 22%.

How do I revoke a trust fund for my grandchildren?

Your ability to revoke a trust fund depends on your state laws and how the trust was set up. Consult with a lawyer to determine the best legal avenue.

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  1. Federal Register. "Estate and Gift Taxes; Difference in the Basic Exclusion Amount."

  2. Internal Revenue Service. "What's New - Estate and Gift Tax."

  3. Internal Revenue Service. "Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return (2021)," Page 1.

  4. Pennsylvania Department of Revenue. "Inheritance Tax."

  5. Iowa Department of Revenue. "Introduction to Iowa Inheritance Tax."

  6. Cape May County, New Jersey. "Do My Survivors Have to Pay Inheritance Tax?"

  7. Social Security. "Program Operations Manual System (POMS): SI 01120.205 Uniform Transfers to Minors Act."

  8. Fidelity. "Fidelity Roth IRA for Kids."

  9. Board of Governors of the Federal Reserve System. "Changes in U.S. Family Finances From 2016 to 2019: Evidence From the Survey of Consumer Finances."

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