Proverbs 13:22 says, “A good man leaves an inheritance to his children’s children.” This timeless wisdom encourages us to think generationally about wealth. But the Scripture doesn’t instruct us on how to leave an inheritance to grandchildren under American federal and state law.
The legal realities of passing assets to minor grandchildren require careful planning to ensure proper management of the inheritance. Let’s walk through some of the contours of leaving an inheritance to your grandchildren and options you have to make it happen.
Leaving Inheritance Directly to Minor Grandchildren is Problematic
One of the fundamental challenges of leaving an inheritance to minor grandchildren is that they cannot legally own property in their own names. If a grandparent leaves assets directly to a minor, a court will likely have to appoint a Guardian over the child’s property to manage those assets until reaching adulthood.
While this arrangement ensures oversight, it has some significant drawbacks.
First, the court will monitor the Guardian’s management of the funds, which can involve ongoing reporting and legal expenses. The Guardian also likely has a lot of constraints on how he or she can manage funds for the child.
Second, once the child turns 18, he or she gains full control of the inheritance. There is no discretion to withhold these assets, even if distributing will harm him or her because of an addiction or inability to manage the funds. Suddenly giving a large amount of money to an 18-year-old is asking for trouble.
Rather than defaulting to court-appointed Guardianship, grandparents should consider one of the two following options: a Trust, or a Uniform Transfer to Minors Act (UTMA) account.
Trusts Can Hold an Inheritance for Grandchildren
The optimal way to leave an inheritance to a minor grandchild is through a Trust. A grandparent may create either a Living Trust, or a Testamentary Trust in a Last Will & Testament. The Trust document names a Trustee to manage the assets on behalf of the grandchild.
Some key advantages of a Trust include:
- The grandparent can specify the Trust’s purposes (e.g., for education, medical expenses, or other needs).
- The Trust can distribute funds gradually rather than as a lump sum at age 18.
- The grandparent can designate an age (or stages) at which the grandchild receives full control over the assets.
- The Trust can protect the inheritance from creditors, lawsuits, or even the grandchild’s own poor financial decisions.
This option provides the most effective management of an inheritance and ensures that a grandchild benefits from the funds in a responsible manner.
There can even be provisions addressing a situation where the grandchild cannot handle the inheritance. The Trustee would manage the assets until such a time, as directed in the Trust instrument.
There are also some downsides with a Trust that ought to be considered.
- Trusts, once they become irrevocable, must file their own tax returns. Tax rates on Trusts are also quite high, hitting 37% at $16,000 of income in 2026.
- Administrative expenses, like Trustee fees, can add up over time. The Trust must have enough funds for it to make sense. A Trust with $25,000 is likely uneconomical.
- If an untrained individual is the Trustee, there is a fairly high chance the Trust will be mismanaged, leading to loss of funds.
So while a Trust is highly flexible, it has to make financial sense to set it up. If there are not enough assets for a Trust, then an UTMA may be preferable.
UTMA Accounts Are Less Effective, But Can Still Be Useful
A Uniform Transfers to Minors Act (UTMA) account allows a grandparent to name a Custodian to manage funds for a minor grandchild until the child reaches a designated age. In Tennessee, the grandparent can specify that the child will receive full control of the funds at age 18, 21, or even 25.
Key advantages of an UTMA account include:
- It is simple to set up and most financial institutions have established procedures for these accounts.
- The Custodian manages the funds without court oversight, and may invest them over long periods.
- The Custodian can use the funds for a variety of purposes even while the grandchild is still a minor.
- Assets in an UTMA are subject to lower tax rates, as the minor child’s tax rates apply.
But the UTMA has notable limitations compared to a Trust:
- The grandparent has less say in the funds’ use.
- The funds become the grandchild’s outright at the designated age, regardless of whether he or she is able to handle the inheritance.
- UTMA accounts do not offer the same creditor and legal protections that a Trust provides. This may even jeopardize financial aid for higher education that would otherwise be available if the funds were in a Trust.
Generation Skipping Transfer Tax
Important to note is that an inheritance to your grandchildren may be subject to an additional layer of tax on top of the federal estate tax.
Generation skipping transfers (GST) are those that intentionally bypass one generation for the next generation below. That would be your grandchildren (or even great-grandchildren). These transfers are subject to the top rate of estate taxation, which is currently 40%.
The good news is that there is a significant exemption level before this tax comes into play. As of January 1, 2026, the exemption level for both estate tax and generation-skipping transfer tax is $15 million per person. This means very few people need to worry about liability for either tax.
If estate taxes may be a consideration in your estate plan, it’s important to also think about the GST tax and if it may apply.
Plan Ahead for a Secure Legacy
Leaving an inheritance to your grandchildren is a wonderful way to provide for their future. But it requires careful planning to ensure proper management of the funds. The last thing we want to see is something that you intended to be a blessing turn into a burden, or for someone to mismanage it.
The key is to create your own plan instead of relying on the government’s plan. Our philosophy is that you know your family and legacy best, not the General Assembly or Congress. But it’s up to you to take the actions necessary to put your plan into action.
Connell Law, PLLC assists residents of Rutherford County and the surrounding area with estate planning. Contact our office to request a consultation. Plan today for a more peaceful tomorrow.
