My Grandson Should Get More! Unequal Bequests

I Want to Leave My Grandson a $500K Inheritance and Skip My Daughter. Can I Gift to Him Directly? | Moneywise. This was the question posed by a reader to Moneywise writer Maurie Backman in the above linked article dated January 31, 2025, or maybe it was just a made-up question by the author to write the above article.?Ms. Backman states:

“Say you’re in a position to give your grandson a $500,000 inheritance, but you don’t want to go through his mother — your daughter — to pass along that wealth. She may have a history of poor financial decisions and you fear she might seize the money to pay off her own debts or buy something extravagant.”

Ms. Backman goes on to tell us all the reasons why a grandparent may want to do this and why an outright inheritance, such as in a will, may not be the best idea.?This is because a will can be contested during probate, delaying or reversing the intended result of the deceased.?She also correctly discusses the benefits of a generation skipping trust, especially if your net worth is such that you may be subject to an estate tax.?But how many US citizens have a net worth more than the current $14MM exemption in 2025 requiring an estate tax return???

Research from The Population Division of the Bureau of the Census estimated that about 2.8 million people died in 2022. Thus, an estate tax return would have been filed for only about 0.25 percent of decedents, and only about 0.14 percent would pay any estate tax.?Figures for 2023 were not much different, at around an estimated 0.2 percent paying any estate tax.?How many people pay the estate tax? | Tax Policy Center

Furthermore, generation-skipping trusts can carry complexity and expense that many people may not want to deal with for a $500,000 inheritance to a grandchild.

Generation-skipping trusts are NOT a broad-based market solution for the other 99.8 percent of the population and there is no mention in Ms. Backman’s article of a solution as simple as a life insurance policy.?What if the grandfather, with the daughter who might “take” the inheritance away from her child, did not have $500,000 to leave to his grandchild, but DID have disposable income and a DESIRE to create such a legacy.

How much would it cost a 65-year-old man to provide a $500,000 benefit to his grandchild??Well, it depends on his health, BUT let’s just say around $9,300 per year if he were in good health.?If he were to tragically die immediately, it may have been the best investment that he ever made, returning 5,300% on his initial premium.?A more logical answer, assuming he lived to a normal life expectancy of say age 85, is that it would cost $186,000 ($9,300 times 20) - which is a return of 8.7% on his premium dollars – tax-free to the grandchild.

But that is just the cost.?The good news about a life insurance contract is that it avoids probate and is immediately available in cash to the beneficiary, versus other non-cash property.?Furthermore, the beneficiary can only be designated or changed by the owner of the insurance contract, which in this case is the grandfather.?The spendthrift daughter would have no control over the policy.?The bigger challenge in this scenario is the age of the beneficiary.

If the beneficiary is a minor, the problem of parental control would still exist, requiring some sort of custodian or trust arrangement, both relatively simple solutions and likely best solved by a Revocable Trust established by the grandfather, which is infinitely simpler than a more complex trust such as a generation-skipping trust.?At the death of the grantor of the trust, in this case the grandfather, the trust becomes irrevocable and the named trustee (possibly a corporate trustee or a trusted friend or relative) would have to act as a fiduciary for the grandchild.

If the grandchild were named a direct beneficiary without a trust, some might worry about a young man or woman having access to $500,000 all at once, which of course, the revocable trust could solve. But, I have another solution.

What if a life insurance policy rider was used to spread out the death benefit over a period of time??What if it was structured in such a way that the benefits were paid out in an initial lump sum plus an income stream for 20 years, as an example??(see chart below)

In the example above, the grandchild is provided with $100,000 at the death of the grandfather (the minimum initial payment), with an additional income stream of $20,000 per year for 20 years.?Since the policy death benefit is provided in a pre-determined and structured manner, the grandfather does not have to buy the entire $500,000 policy. He can purchase a smaller policy of $425,480, reducing his premium payments to $8,150 as opposed to the original $9,300 per year, saving $1,150 per year.

Imagine if this income stream of $20,000 was provided each year on the grandchild’s birthday??What a powerful legacy for the grandfather who posed this question to Maurie Backman at Moneywise.?What a shame that this idea was not even mentioned.

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