The Best Ways to Leave Money to Grandchildren

As a grandparent looking to leave money to your grandchildren, you have many options available to you. Let’s take a look at the best of those options.

Data published by the Office for National Statistics and the UK government in its 2023 Trusts Report show that bare trusts have become a very popular way to leave money to children. 

However, what represents the best way to leave money to your grandchildren? The reality is that this will depend on a variety of circumstances and several factors that I encourage you to consider.

In this guide, I review the range of options as I consider the best ways to leave money to grandchildren. Please note, as I say, the best way will depend on your own circumstances, and I encourage you to think them through, as you work through this guide.

For example, there are advantages and disadvantages associated with each of the options. Relevant key factors, such as tax efficiency, legal considerations and the needs of your grandchildren, all play a part.

Key Takeaways

• I’ve identified 6 popular ways to leave money to your grandchildren.
• No one option is the ‘best’. They all depend to a degree on circumstances.
• Leaving money in a will remains a popular option, but can be tax-inefficient.
• Bare trusts, as a means of transferring wealth, have surged in popularity.
• People often overlook tax considerations, and these should be a key factor.

Leaving money to your grandchildren can be a great way to provide for their future, which no doubt is why you are considering it. If done in the most appropriate way, it can also be very tax-efficient for your estate and reduce the potential liability to inheritance tax.

Grandparents leaving money to grandchildren have most commonly named them as beneficiaries in their wills. However, gifts in a will can be inefficient from an IHT perspective. This is because they will form part of the taxable estate. Depending on the size of your estate, the gift could effective cost the estate by up to 40%.

Data published by the UK government in the 2023 Trusts Report shows that an increasing number of people are setting up bare trusts during their lifetime as a tax-efficient way of leaving money to grandchildren. 

I take a very close look at bare trusts (and other trust types) in this guide.  I also look closely at the alternatives, as I explore the best ways to leave money to grandchildren in 2024.

Options for Leaving Money to Grandchildren

As I have said, there are a lot of ways to leave money to grandchildren. Each option has its own potential advantages and disadvantages. Let me talk you through them.

There is no ‘one best option’, as this is very much driven by circumstances.

The options to consider include:

1. Making an immediate gift to your grandchildren.
2. Leaving money to grandchildren in a will.
3. Setting up a trust fund for grandchildren.
4. Paying into a Junior ISA for your grandchildren.
5. Pension contributions on behalf of grandchildren; and
6. Purchasing life insurance for them.

I take a close look at each of these options later in the guide.

Understanding Your Goals and Circumstances

Before we look in detail at each of the above 6 options, let’s first think about defining your goals, and considering the circumstances relevant to you personally.

Defining Your Objectives

Defining your objectives will assist you in deciding which of the 6 main ways to leave money to your grandchildren is best for you.

Start by thinking about what you are seeking to achieve by leaving the money to your grandchildren. Are you aiming to support their education? Or provide a safety net for their future? Or maybe you are looking to minimise the inheritance tax that your estate will have to pay when you are gone? Each of these is a valid objective.

Your goals will directly influence which of the 6 options are most suitable for you. For example, consider the 3 common objectives below:

• Education: If your primary goal is to fund your grandchildren’s education, or to provide them with a lump sum when they turn 18, then a bare trust or a Junior ISA may be good options.
• Long-Term Security: If you want to ensure the long-term financial welfare of your grandchildren and you don’t want them to receive all of the money as soon as they turn 18, then a discretionary trust or pension contributions can be good choices.
  
• Tax Efficiency: If minimising the inheritance tax that will be payable by your estate once you are gone is your priority, then tax-efficient options like trusts, pensions, or life insurance are relevant.

The Circumstances of your Grandchildren

The age of your grandchildren will most likely play a part in setting your goals. Their age will also impact the options available to you for leaving money to your grandchildren. 

For example, if your grandchildren are already over 18 years of age, then a bare trust will not be a suitable option, as, once a person reaches 18 years of age, they have an absolute right to receive the asset (in this case money) held within the trust. In this case, it would be simpler to gift the money to them.

For grandchildren aged over 18, paying into a personal pension for your grandchild can be tax-effective. This is because they do not pay tax on the money until they draw it out of the pension. However, it comes with the disadvantage that they cannot access it until they are 55 years old. Although, quite possibly you’ll see that as an advantage! So much depends on the circumstances and your goals.

Assessing Your Own Financial Situation

Giving thought to your own financial situation is important when considering the ways to leave money to your grandchildren.

I suggest that you consider the following three key factors:

• The value of your estate: Add up the total value of all of your existing assets. Include all of the property that you own, investments that you may have, and any savings that you have. Deduct any significant liabilities you have, such as a mortgage.
• Your income needs: Assess whether the value of your estate (a) significantly exceeds your income needs (now and for the future) and (b) is already over the applicable IHT threshold. If the answers to both questions are ‘yes’, then you are better leaving the money to your grandchildren now.
• Potential growth of assets: Give consideration to whether you want the money to grow over time, or you are comfortable with it depreciating.

Considering the Grandchildren’s Needs

Once you have considered your objectives and your own circumstances, it’s now time to think about the needs of your grandchildren.

Think about the following three key factors:

• Age: Whether your grandchildren are over 18 years of age affects the suitability of several of the ways to leave money to grandchildren. Also, give some thought to the age at which you want them to be able to use the money that you will be leaving them.
• Financial Responsibility: How financially responsible are they? Do they, or will they, have the financial acumen to manage the money that you want to leave them effectively. The amount of money you intend to leave them is relevant to this factor.
• Disabilities: If the grandchild has disabilities, then careful consideration needs to be given, so that you do not prejudice their ability to obtain government support. A discretionary trust is likely to be a preferable option in this situation. Take specialist advice from a financial adviser if your grandchild has needs due to a disability.

6 Options for Leaving Money to Grandchildren

Of the range of options available, 6 of them, are in my opinion, worth considering.

Option 1: A Straight-Forward Cash Gift

A cash gift may be suitable for you if you are comfortable with your grandchild receiving the money immediately.

A potential advantage of a cash gift is that the money will be available to your grandchild right away. However, you might see this as a disadvantage, depending on your grandchild’s circumstances and level of responsibility.

A tax gift can be tax effective, as it will be considered a Potentially Exempt Transfer (PET) for inheritance tax purposes. For more information on this, read our guide to the 7 year rule and inheritance tax.

Several key advantages and disadvantages of a cash gift as a means of leaving money to your grandchildren are covered below.

Advantages of Cash Gifts

• Flexibility: Cash gifts can be given directly to your grandchildren (or their parents) at any time during your life. 
• Immediate Benefit: Your grandchildren will have the immediate benefit of the money and can use the money.
• Simplicity: There is no legal structure or ongoing management required, unlike with certain types of trusts.

Disadvantages of Cash Gifts

• Potential Tax Liability: If you pass away within seven years of making the gift, then the gifted money will be added back into your estate and may be liable to inheritance tax. The tax would be payable by the estate.
• Lack of Control: Potentially the biggest disadvantage of gifting money to a grandchild is the total loss of control over the money from the date that it is given. It is for this reason that people often prefer discretionary trusts, instead of a gift of money, where the amount is large.

It is not necessary to put a document in place if you decide on a cash gift. However, if the amount being gifted is large, we recommend putting in place a simple deed of gift. Doing so will record the gift. The deed can then be used to demonstrate to HMRC when the gift was made. This may be useful when assessing any inheritance tax liability of the estate.

Option 2: The Traditional Leaving Money to Grandchildren in a Will

A historic favourite and another simple option!

Data published by the Office for National Statistics (ONS) shows that, as of 2018, 67% of grandparents left money to their grandchildren in their will. 

This ONS data confirms that most grandparents do leave money to their grandchildren in their will. This certainly won’t surprise you. Historically, it’s the option most people will think of. 

Leaving money to your grandchildren in your will is perhaps the simplest way to leave money to them. However, depending on the value of your estate, it is unlikely to be tax-efficient. 

Advantages of Willing the Money

• Simplicity: The only thing that you need to do is to create a will and record in the will the gift that you want to leave to your grandchildren.
• Flexibility: You have the flexibility of being able to change your will at any time during your lifetime.

Disadvantages of Willing the Money

• Deferred benefit: The money that you want to leave to your grandchildren will not be available to them until you die, which hopefully will be many years away!
• Tax Liability: Deferring the gift results in a missed opportunity to reduce the value of your estate for inheritance tax purposes. This may result in greater tax being payable.

Option 3: The Popular Trust Funds for Grandchildren

Overview of a Bare Trust

A bare trust is a simple, and the most common, way to transfer money to a grandchild who is under the age of 18. 

With a bare trust the money is transferred into the trust. The trust is then managed by a trustee that you appoint. This can be you, or you may choose to appoint the child’s parents. Or both as you can appoint multiple trustees.

The trustee(s) can use the money in the trust for the benefit of the grandchild at the discretion of the trustee(s).

Note though, that once the grandchild turns 18 years of age, they will have an absolute right to demand the money. At this point, the trustee loses the ability to manage the money for the grandchild, unless the grandchild agrees.

Bare trusts are a very popular way of leaving money to grandchildren. The Government’s 2023 Trusts report shows that they are the most popular of all trust types. In part this is down to how simple they are to set up and manage.

A bare trust can be set up by simply completing a bare trust deed and moving the money to a bank account in the name of the trustee(s). The bank will (sometimes reluctantly) record that the account is a trust account.

Unlike other types of trust, there is no annual tax filing requirement for the bare trust, but it must be registered with HMRC once it is set up.

We cover bare trusts in detail in our guide to bare trusts which you can read on our bare trust deed template page.

I’ll summarise below the key advantages and disadvantages of a bare trust.

Advantages of a Bare Trust

• Simplicity: Easy and cheap to set up and manage with no ongoing filing requirements.
• Tax Efficiency: The transfer of money to the trust counts as a PET. Income and gains from the money in the trust are taxed at the beneficiary’s rate, or in the case of a minor, their parents.
• Control: Whilst the beneficiary remains under the age of 18 you, via the trustee(s) have control over how the money is used for the benefit of your grandchild.

Disadvantages of a Bare Trust

• Limited Flexibility: Once you have set the trust up, you cannot make changes to its terms.
• Potential Control Risk: The grandchild will gain full access to the money once they are 18.

Overview of Discretionary Trusts

A discretionary trust is one where the trustees are given the power to decide how and when to distribute the trust’s income and capital to the beneficiaries.

Discretionary trusts are popular where a grandparent wants to leave money to grandchildren who may be young or have not yet been born, and wants the trustees to use their discretion in deciding how to apply the money between the grandchildren. For example, based on their own needs, or any other factor(s) that you may decide are relevant.

Advantages of a Discretionary Trust

• Flexibility: The trustees have absolute discretion to decide when and how much money is distributed based on each beneficiary’s needs.
• Protection: Assets in a discretionary trust are protected from creditors and may be shielded in cases of divorce or bankruptcy.
• Tax Planning: The transfer of the money counts as a PET. A discretionary trust can also be structured to minimise the tax liabilities for both the trust and the beneficiaries named in the trust.

Disadvantages of a Discretionary Trust

• Complexity: The trust document is relatively complex. So we recommend that you engage a specialist estates and trusts advisor if you decide to leave money to a grandchild via a discretionary trust.
• Costs: The annual trust filing requirement with HMRC will often require that you engage an accountant or specialist advisor.
• Tax Implications: Discretionary trusts can potentially be subject to higher rates of tax on income and gains, as the trust itself is taxed. Given the complexity and range of potential tax considerations, please take specialist advice if you are considering setting up a discretionary trust. Unlike a bare trust it is not a DIY option!
• Minimum of 2 beneficiaries: You need more than one beneficiary in a discretionary trust. One way to handle this if there is only one grandchild in the family at present, would be to add either a child (e.g. one or both of the grandchild’s parents), or a charity of your choice, as the second beneficiary.

Option 4: The Straightforward Junior ISA

I expect that you have already heard of a Junior ISA. It represents a tax-efficient way to save up money for children under the age of 18. This is because the interest is tax-free. As a grandparent, you can set up a Junior ISA and you can pay into it annually up to the limit set by the government each tax year. The grandchild will then take over the account when they reach 18.

Advantages of a Junior ISA

• Tax-Free Growth: There is no income tax or capital gains tax payable on the interest generated by the money that you save into the Junior ISA.
• Access at Age 18: Your grandchild will have access to the money when they turn 18.
• Easy Setup: Most banks enable you to do it on their website.
• Stocks and Shares ISA: a Junior ISA can (and should) be used to invest in shares. Avoid cash ISAs!

Disadvantages of a Junior ISA

• Limited Contribution Limits: The annual contribution limit is relatively low. So it won’t be suitable for large sums. As of 2024 the annual limit is £9,000.
• Full Access at 18: The grandchild will get full access to the money in the ISA at 18. Some grandparents might consider this to be too young.

Option 5: Pension Contributions

This is an option that many people would not immediately think of. Paying into a grandchild’s pension is definitely a long-term strategy. This often-overlooked way to transfer money is an effective way of leaving money to a grandchild for use later in their life.

It can also be very tax-efficient.

Advantages of Pension Contributions

• Tax Efficiency: Money paid into the pension will count as a PET. The contributions benefit from pension-based tax relief. That helps enhance the value of the gifted money as it accumulates.
• Long-Term Growth: The money has potentially decades to grow. In turn, the accumulated growth may be considerable if (a) the pension fund is managed well and (b) aims for a high level or risk and reward for maximum long-term growth. Doubling the fund just over every 7 years is achievable.
• Flexibility: As a grandparent you can pay into the pension at frequencies, and in amounts, that suit your ongoing circumstances.
• Controlled Access: The funds are locked in until the grandchild reaches retirement age. Meaning that they will only be available to them later in their life.

Disadvantages of Pension Contributions

• Delayed Access: A benefit to some, but a major disadvantage to others. A lot of grandparents will see the fact that the grandchild cannot access the money until much later in their life as a big disadvantage.
• Complexity: Setting up a pension for a minor can only be done by their parent or guardian. The process is quite complex and you should engage a professional financial adviser before you proceed with this option.

Option 6: Life Insurance

You can use life insurance to leave money for grandchildren. The beneficiary can be your grandchild or it can be a trust. 

If it is expected that the grandchild will still be a minor at the time of the grandparent’s death, then it is common to set up the life insurance so that a trust is the beneficiary. This can be either a bare trust or discretionary trust (as noted above, the latter needs more than 1 beneficiary in it).

Advantages of Life Insurance

• Defined Payout: The policy will provide for the underwriter to pay a sum to your grandchildren when you pass away.
• Affordability: You pay for life insurance with monthly payments. It avoids the need to transfer a lump sum to the grandchild or to a trust.
• Avoids Probate: Life insurance payouts are not included in your estate when you die. So the underwriter can pay it directly to the beneficiary, which avoids the potential delay of getting probate.

Disadvantages of Life Insurance

• Ongoing Premiums: Of course, it will be necessary to make a monthly payment for the rest of your life. This can become expensive over time. If you don’t keep up the payments, the policy will lapse.
• Potential Complexity: Setting up a life insurance policy with a trust can be relatively complex. You will certainly need to take specialist advice from a financial adviser. This is especially the case if you decide to set up a discretionary trust as the beneficiary of the policy.

Tax Considerations When Leaving Money to Grandchildren

As I explained at the beginning of this guide, consideration must be given to the range of taxes that may be relevant to the money that you decide to leave to your grandchildren. Let’s take a look at them.

Inheritance Tax (IHT)

Inheritance tax in the UK is currently (i.e. as at August 2024) charged at 40% on estates over the threshold. Check the current IHT thresholds on the Government website.

Transferring money to grandchildren, either directly or via a trust, is increasingly popular. This is because of the potential tax-efficiency of giving the money early. By doing so, you reduce the taxable value of your estate.

Note that several useful exceptions apply to IHT. These are:

• The Annual Gift Allowance: You can give away up to £3,000 in each year to different individuals without its being added to the value of your estate for IHT purposes when you die. This is not a limit per person, but an overall limit. Effectively, you divide this limit between your grandchildren in this example.
• Potentially Exempt Transfers (PETs): Gifts that are made more than seven years before your death are considered to be a PET: they aren’t added back into your estate for calculating IHT. However, if you die within seven years of making the gift, the value is added into your estate for IHT purposes, subject to taper relief. Read about PETs and the 7 year rule here.
• Exempt Gifts: Gifts for weddings are exempt from IHT. If you want to help a grandchild who is about to marry, then gifting the money to them may be the best way to help them.
• School fees for grandchildren: these would normally be a PET. If you can demonstrate that you paid the private school fees on a regular basis out of surplus income (i.e. not out of selling off investments or other capital), then they can be free of IHT, even though they are over the £3,000-a-year gift limit. This is a brilliant exception – often one that people overlook.

Capital Gains Tax (CGT)

Capital gains tax will not apply if you leave money to your grandchildren. However, if you decide to leave other asset types, then it may apply. For example, if you transfer property or shares to your grandchild then it will apply.

It’s important to consider:

• CGT Allowance: You currently have an annual CGT allowance of £3,000 (tax year 2024-25), which can be used to offset any gains before tax is payable to HMRC. However, this is due to disappear in the next tax year (2025-26).
• Transferring Property: If you gift property to your grandchild, you may be liable for CGT on the difference between the property’s value when you acquired it and its value when you transfer it to the grandchild. A minor cannot hold property in their name, so, when transferring property, you will need to set up a trust first.

Annual Gift Allowance

The annual gift allowance in England is currently £3,000 per tax year. Any person can make a gift up to this amount with it being exempt from being added back into your estate if they die within 7 years of making the gift.

Note that you can carry forward any unused allowance from the previous year to the next tax year. This might add up to an immediate potential £6,000 exemption.

7-Year Rule for PETs

The 7-year rule, which creates ‘potentially exempt transfers’ (PETs), is very relevant when considering leaving larger sums of money to grandchildren. 

Cash gifts made directly to your grandchildren, or via a bare or discretionary trust, count as PETs. A PET can provide for a tax-efficient way of transferring money to a grandchild, for the reasons explained above.

4 Mistakes When Leaving Money to Grandchildren

So there are many ways to leave money to your grandchildren, and we’ve looked closely at 6 of the best ways. Before you decide on which option is best for you, give some consideration to common mistakes. That way you can avoid them!

1. Failing to Consider Tax Implications

Overlooking the tax implications of your gifts can make for a big mistake. The tax position on gifts and bare trusts is straightforward. Gifts in a will may give rise to IHT at the full rate. You should take specialist advice from a financial adviser if you are considering the other four options. 

2. Failing to Set Up Proper Trust Structures

If you decide on a bare or discretionary trust, make sure that you set it up correctly. A bare trust is simple to do yourself. However, if you decide on a discretionary trust, then I definitely recommend hiring an estates and trusts solicitor to set it up for you.

3. Overlooking Their Ability to Manage Money

The younger the grandchild, the less likely that the grandchild will be able to manage their money effectively. Putting a grandchild in control of the money at too young an age can lead to their wasting the money.

4. Leaving it too late

Given the effect of the 7-year rule, many people leave it too late and assume they will survive, hoping that Inheritance Tax does not catch them. So this rule encourages you to take action earlier in your life, rather than perhaps leaving it into your 80s or 90s.

FAQs on Leaving Money to Grandchildren

What is the Best Age to Leave Money to a Grandchild?

Hopefully, you now realise that the best age will depend on what you are looking to achieve. The ability of your grandchild to manage the money will also affect the age at which you should leave money to them. 18 or earlier are popular ages at which to leave money to grandchildren. This is clear from the popularity of bare trusts for leaving money to grandchildren.

How Can I Ensure My Grandchild Uses the Money Wisely?

You can consider setting up a discretionary trust, under which you instruct the trustees to release money only in the circumstances that you set out. NB As said before, you need more than 1 beneficiary in the trust for it to be a discretionary trust.

Can I Change My Mind About a Gift After It’s Given?

No, if you make a gift of the money, either directly, or through a trust, you can’t take it back. Putting money into a discretionary trust with flexible trust terms can provide for control over how the money is used. A bare trust gives little or no control after the child or grandchild reaches age 18, but is much cheaper and simpler to set up.

What Happens if My Grandchild Dies before Me?

If a grandchild dies before you, then what happens to the money will depend on the way you chose to leave the money to them. With a gift, bare trust, Junior ISA or pension contribution, the money will form part of their estate. If they left no will, then the Intestacy Rules determine how the money transfers. With a discretionary trust, you can set the trust terms so that the money benefits another person.

Final Thoughts

It will (hopefully) by now be clear to you that no single option represents the ‘best way to leave money to grandchildren’. Instead there are many ‘good’ options for leaving the money. 

You should consider the merits of each option alongside your own circumstances.

If you decide on any of the more complicated options, such as setting up a discretionary trust, or a pension policy, then please take specialist advice. A financial adviser will be able to help you with a pension policy. A trusts solicitor will be able to set up a discretionary trust for you.

If you are considering one of the more simple options, then our Deed of Gift and Bare Trust Deed templates (drafted by my co-founder David) will enable you to do this cost-effectively. 

I hope this guide has proven worth taking the time out to read. If you have any questions, please do email us.