Leaving Assets to Grandchildren: Tax Implications and Trust Options

Disclaimer: This article is for general educational purposes and does not constitute legal or financial advice. Inheritance laws and tax considerations can vary depending on personal circumstances and assets involved. If you reside in Queensland or hold cross-border property, consult a qualified solicitor or tax professional to ensure your estate plan aligns with local requirements and optimises outcomes for your grandchildren.

Many seniors hope to leave a meaningful inheritance for their grandchildren—supporting education, life milestones, or future financial stability. In Australia, bequeathing assets to minors or young adults is feasible, but tax rules, trust structures, and potential family complexities can influence how much they actually benefit. This guide explores key tax implications of gifting assets to grandchildren and outlines trust options (like testamentary trusts) that can streamline or protect the inheritance.

Why Leave Assets to Grandchildren?

1. Education & Early Support
   Some grandparents wish to fund university fees, property deposits, or start-up capital for their grandchildren.
2. Skips a Generation
   Instead of passing everything to adult children, direct gifts to grandchildren can ensure financial help arrives at a pivotal young age—like early adulthood.
3. Estate Planning Strategy
   Distributing wealth among multiple generations might reduce certain family conflicts, especially if children are already financially secure.

Tax Implications to Consider

No Direct “Inheritance Tax” in Australia

Australia does not impose a formal inheritance tax, but taxes can arise indirectly:

1. Capital Gains Tax (CGT)
   If the estate sells assets (like shares, investment property) to create funds for distribution, CGT might reduce the final sum. Alternatively, the cost base might pass on to the grandchildren, who pay CGT only when they eventually sell.
2. Income Tax on Inherited Funds
   A lump sum inheritance isn’t taxed. However, if grandchildren (particularly minors) invest or earn income from that sum, standard tax rules apply. Minors typically face higher penalty rates on unearned income—unless structured through a testamentary trust.
3. Stamp Duty
   If real estate is transferred to a grandchild, they might owe stamp duty unless it’s structured otherwise or an exemption applies (rare in direct grandchild transfers). The exact arrangement might vary by property location or usage.

Practical Note: Minimising CGT or stamp duty often demands professional advice—especially if multiple properties or share portfolios exist.

Trust Options for Grandchildren

Direct Bequest in the Will

You might name each grandchild as a beneficiary of a set amount of money or a fraction of the estate. However:

• If they are minors, a trustee (often the executor) must manage the inheritance until they reach 18 (the age of majority in Queensland).
• Income generated from the inheritance could be taxed at higher “penalty rates” if held outside a trust structure.

Testamentary Trusts

A testamentary trust arises upon your death, as dictated by your will. It can:

1. Provide Tax Advantages
   Income allocated to minors via a testamentary trust is often taxed at normal adult rates, not penalty rates. This can yield significant savings for large bequests generating ongoing income (rent, dividends, etc.).
2. Protect Against Poor Money Management or External Claims
   If grandchildren are young or potentially vulnerable, the trustee manages and invests the funds responsibly, releasing them at suitable intervals or ages.
3. Maintain Control Over Distributions
   You can set triggers (e.g., partial release at age 21 or completion of university). The trustee must follow your instructions, ensuring grandchildren do not blow the inheritance prematurely.

Inter Vivos Trust (While Alive)

Another approach is creating a trust during your lifetime (an inter vivos trust). But:

• Gifting assets to the trust can trigger CGT events.
• There are no special advantages for minors receiving income from a standard trust—unlike testamentary trusts, which allow normal adult tax rates on a child’s income.

Conclusion: Testamentary trusts generally outweigh inter vivos trusts for grandchildren’s inheritances from a tax perspective, because of the beneficial tax treatments specific to deceased estates.

Scenario: Using a Testamentary Trust for Grandchildren

Example
Margaret wants each of her three grandchildren to inherit a portion of her $900,000 share portfolio. She sets up a testamentary trust clause in her will:

• The trust divides into three sub-trusts once she passes.
• Each grandchild’s sub-trust invests in shares or term deposits.
• Income is distributed annually for their education or personal development at normal adult tax rates.
• Grandchildren can access capital at age 25, or earlier for essential educational needs.

Result: The grandchildren avoid penalty tax rates on investment income, preserving more of the inheritance. The trustee ensures that they only receive large lump sums once older, presumably more financially responsible.

Additional Considerations

Family Provision Claims

Any direct or trust-based gift to grandchildren does not preclude other family from lodging a family provision claim under the Succession Act 1981 (Qld). If an adult child or spouse is left with perceived insufficient support, they might challenge the estate. Properly balancing bequests or providing your reasoning in a letter of wishes can mitigate disputes.

Contingency Planning

You may want certain grandchildren to inherit only if their parents pass away or if the child of your daughter predeceases you. Clear conditional language or alternative beneficiaries avoids confusion if circumstances shift.

Legislative Changes or Maturity

Laws around trusts, minors’ tax rates, or testamentary structures can evolve. Update your will or trust details after major legislative changes or if your grandchildren’s ages and needs shift.

Frequently Asked Questions

1. If I leave a lump sum to a minor grandchild, is it taxed at high rates?
Direct gifts to minors aren’t taxed at the time of inheritance. However, any income generated from that sum (e.g., interest, dividends) can face penalty child tax rates—unless it’s from a testamentary trust, which grants standard adult tax rates.

2. Do I need probate if all I’m leaving is a bank deposit to my grandchildren?
Depends on the bank’s threshold and estate complexity. If the estate’s total holdings surpass certain levels or if the bank insists, your executor may need probate to legally release funds.

3. Can I specify an age beyond 18 for them to gain control of the inheritance?
Yes. A testamentary trust can hold funds until a later age—21, 25, or another milestone you choose. The trustee administers assets during that interim, distributing for the grandchild’s benefit if needed.

4. Are superannuation death benefits automatically payable to grandchildren?
Unless grandchildren are considered dependants (rare unless you actively care for them or they’re financially reliant), super typically must go to your estate or an eligible dependant. You may direct funds to your estate, then have your will set aside for grandchildren, but consult a professional to confirm the best approach.

5. If I set up an inter vivos trust for my grandchildren now, do they get the same tax benefits as from a testamentary trust?
No. Children receiving income from a living trust generally face penalty rates if they are minors. Testamentary trusts, triggered by death, allow minors to be taxed like adults on distributed income. This difference can be crucial in deciding your estate plan approach.

Key Takeaways & Summary

1. No “Inheritance Tax,” But…
   While Australia lacks a dedicated inheritance tax, CGT or minors’ income tax rules can reduce grandkids’ net benefit.
2. Testamentary Trust Advantages
   Setting up a testamentary trust in your will often yields better tax treatment for minors, plus controls on how and when they inherit.
3. Balance Family Needs
   Keep in mind other heirs or potential claimants if leaving large sums to grandchildren. Family provision claims may arise if adult children or spouse feel short-changed.
4. Seek Professional Advice
   Combining tax knowledge (for CGT and child rates) with legal expertise (valid will drafting, trust clauses) ensures an effective inheritance strategy for your grandchildren.

By leveraging testamentary trusts, clarifying your bequests, and anticipating potential disputes, you can provide meaningful, tax-conscious gifts that truly enhance your grandchildren’s future, preserving both your estate’s worth and your legacy’s intent.