Planning Ahead for Grandchildren

Q. Two years ago, our daughter Meredith got married. Today, she called to tell us that she is expecting twins! My husband and I are overjoyed, as they will be our first grandchildren. We want to make sure we include them in our planning. We know how expensive it was to send our children to college (and that was 10+ years ago), so we certainly want to put money towards their education. Are there ways to gift our grandchildren money that will benefit their educations, but not disqualify us for Medicaid in the future? Also, should we make updates to our own estate planning documents? We’ve already left everything to our daughter, so won’t it all go to her children, anyway? Thanks for your help!

A. Becoming a grandparent changes everything. I know, because I am a proud grandfather to our sweet and energetic 8-year old grandson, Gregory.

Many will describe the feeling when you first hold your grandchild (or, in your case grandchildren!) as an incredible jolt of joy and overwhelming emotion. And, chances are good that money won’t be the first thing on your mind. But, as you mentioned, it won’t be long before you want to help to create a solid financial foundation for them, including helping pay for their educations. And you are right – having a strategy to help pay for your new grandchildren’s education, without penalizing you or your husband for Medicaid in the future, can give you peace of mind now and you and your husband, your daughter, and her children a sense of relief later.

Giving the Gift of Education

Currently, a single year’s tuition at a public institution is expected to rise above $44,000 by 2030, and it’s predicted to be twice that much at private schools, according to the U.S. Department of Education. Given this, the earlier you start a college savings program such as a 529 college savings plan for your grandchildren, the more impact your gift is likely to have. With a 529 plan, money you set aside has the potential to grow tax-free until it’s needed, and there’s no tax when the money is spent on qualified higher education expenses. If you start a 529 now and let it build for 18 years, the tax savings should be significant.

One major drawback to setting up a 529 plan, however, is that if you need nursing home care in the future, the 529 plan that you have set up for your grandchild could destroy your eligibility for Medicaid. Because you control the account and have the right to cancel the account and take the money out, the government considers your 529 plan a “countable asset.” That means you’ll be required to use that money to pay for your long-term care expenses before you qualify for Medicaid.

Since everyone might need to apply for Medicaid in the future, you should consider contributing to an account in someone else’s name as the custodian/contributor/account owner for your grandchildren, such as your grandchildren’s parent (your daughter). That way, the plan won’t be considered a countable asset for purposes of Medicaid for you, and in any event will hopefully be used up by the time either of you needs Medicaid.

However, even this strategy won’t get you off the hook entirely. When you apply for Medicaid, the state will review your finances during the previous 60 months. Any gifts made during this “look-back” period, including contributions to a 529 savings plan, could hurt your eligibility for Medicaid benefits. This problem is exacerbated if you plan on making regular, ongoing contributions to a 529 savings plan for your grandchildren, because each contribution you make would be a new gift that would begin a new 60-month look-back period.

An effective way to prevent this from happening is by setting up an irrevocable trust such as The Living Trust Plus™ and making the contributions to the 529 plan from the trust. The Living Trust Plus™ functions very similarly to a revocable living trust and maintains much of the flexibility of a revocable living trust, but protects your assets from the expenses and hassles of probate PLUS the expenses of long-term care while you’re alive, PLUS lawsuits and a multitude of other financial risks during your lifetime. You would make a one-time gift to the trust, starting the 5-year lookback period, and your future contributions from the trust to the 529 plan would not count as new gifts. Please note this is the “short version” – the actual mechanics are a bit more complicated.

The Living Trust Plus™ Asset Protection Trust protects your assets (including the money in the 529 plan) from lawsuits, auto accidents, creditor attacks, medical expenses, and — most importantly for the 99% of Americans who are not among the ultra-wealthy — from the catastrophic expenses often incurred in connection with nursing home care.

If you would like more information about the Living Trust Plus™, please contact us for an appointment, or click here to register for one of our upcoming Living Trust Plus™ informational seminars.

Updates to Estate Planning Documents

You now have two potential new estate beneficiaries, and you should make sure that your estate planning documents reflect that. In your current documents, you may have stipulated that the inheritance will go to your daughter and her husband, on the assumption that it will also be used to care for any grandchildren. But what if family circumstances change — your daughter dies and her husband remarries, for example? There’s no guarantee that your grandchildren will receive the benefit you intended. To make sure that your grandchildren receive the inheritance you want to leave, you may need to update your estate planning documents.

Even without the upcoming birth of grandchildren, everyone who has an estate plan in place should not let more than 5 years pass between updating your plan, as the cost to your family if you neglect your plan could be disastrous. Please see our post about when you should update your estate planning documents. New grandchildren is certainly on the list.  Also, be sure to ask about The Farr Law Firm’s Lifetime Protection Program, which ensures that your documents are reviewed and updated as needed, so that they will have the proper effect under the law. Ready to plan or update your planning? Please contact us as soon as possible to make an appointment for a no-cost initial consultation:

Fairfax Estate Planning: 703-691-1888

Fredericksburg Estate Planning: 540-479-1435

Rockville Estate Planning: 301-519-8041

DC Estate Planning: 202-587-2797

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