From Trusts to Gifts: How can grandparents effectively leave assets to grandchildren?

In India, where family ties are deeply rooted, it’s common for grandparents to think about the future financial well-being of their grandchildren. This cultural tradition stems from a sense of legacy, love, and responsibility. Grandparents, having lived through various financial ups and downs, often want to secure a stable foundation for the next generation.

Beyond emotional connections, there’s also the reality of rising education costs, property prices, and the need for financial security, which makes passing down assets particularly meaningful in Indian households.

Also, in some cases, grandparents are not confident to pass their assets to their children and might prefer to transfer their assets to their grandchildren with certain ‘terms and conditions’.

Impact on family dynamics

Grandparents often serve as the guiding force within extended families, so their financial gifts represent more than monetary aid—they symbolise continued care and love. Such gestures may also mitigate financial burdens on middle-generation parents who might otherwise feel pressure to secure their children’s futures alone.

However, this dynamic can also spark conflict, especially in larger families. If assets are distributed unevenly, or when grandchildren from one sibling receive more attention, it can create tensions. This can lead to disputes over perceived favouritism or the distribution of inheritance. Transparency and communication are crucial for ensuring that such gestures of goodwill don’t inadvertently create familial discord.

Legal instruments for asset transfer

Grandparents can leave assets for their grandchildren through various legal instruments, each offering different benefits and levels of control.

Direct gifting: Grandparents may directly transfer assets such as money or property to their grandchildren. However, this approach can be limiting since children, especially minors, cannot manage large sums independently. While this method may seem straightforward, it lacks built-in safeguards for how the assets are used.

Trusts: Setting up a trust is a more structured way to ensure that the inheritance is managed responsibly. With a trust, grandparents can specify how and when the assets should be distributed, appointing a trustee to oversee the process. Trusts allow for better control of how funds are spent, ensuring that the grandchildren receive money for specific needs like education or marriage. Trusts can also shield assets from certain legal and financial challenges.

Sukanya Samriddhi Yojana (SSY): This government-backed scheme is designed to help secure the financial future of a girl child. Grandparents can open an SSY account for their granddaughters, offering tax benefits under Section 80C of the Income Tax Act and it matures when the girl reaches 21 years of age.

Systematic Investment Plans (SIPs): SIPs allow grandparents to invest in mutual funds, building a corpus over time for their grandchildren. SIPs are flexible, providing steady growth while allowing grandparents to contribute smaller amounts regularly, making them suitable for long-term wealth creation.

Fixed (FDs) and recurring deposits (RDs): Grandparents can invest in these safe, low-risk options to accumulate wealth for their grandchildren.

Swetha Kochar, founder and partner at PKC Management Consulting says, “Selecting a diversified equity mutual fund with a long-term growth perspective can ensure financial gift supports the aspiration and needs of grandchildren.”

She recommends keeping proper documentation of their investments, including SSY account statements, mutual fund investment records, property ownership documents, and beneficiary details. This is crucial for legal compliance and potential future audits ensuring transparency and clarity regarding the ownership and management.

Important considerations

The key difference between directly leaving money and using financial instruments like trusts or SIPs is control and management. Directly leaving assets may result in grandchildren having unrestricted access to the inheritance, which could be misused. 

Trusts, on the other hand, allow for phased distribution, helping ensure that the money is used for important life milestones. “Consulting with estate planning attorneys and tax advisors can ensure that the financial support for the grandchildren is both legally sound and tax-efficient”, says Deepak Jain, CWM®, CFP®.

Nikhil Varghese, Co-Founder, Yellow observes that individuals who are US citizens might want to skip a generation to save tax.

“When transferring assets in the U.S., once certain limits are exceeded, there’s an estate tax of about 40%. If you give $100 to your children, 40% is taxed, leaving $60. If that goes to your grandchildren, another 40% is taxed, leaving only $24. But if grandparents give directly to grandchildren, only one 40% tax applies, preserving more wealth,” said Nikhil.

There are certain tax implications in some cases as well. The Indian Income Tax Act has specific provisions regarding gifts and inheritance. Gifts received from grandparents are exempt from tax, as long as the recipient is a relative under the law, which includes grandchildren. However, any income earned from these assets, such as interest or capital gains, is taxable. If a minor grandchild receives a gift, the income generated from it will be clubbed with the income of their parent or guardian under section 64 of the Income Tax Act.

Swetha believes that grandparents should carefully select trustees who will oversee the trust and manage its assets in the grandchildren’s best interests. They have a legal duty to adhere to the conditions specified in the trust deed and ensure that the assets are used for the intended purposes, such as education or personal development.

Weighing the upsides and downsides

Leaving assets for grandchildren can provide substantial benefits as it fosters long-term financial stability and can ensure that they have access to education and other opportunities. Tax-efficient options such as trusts and SSY accounts, can help maximise returns while reducing tax liabilities. Structuring assets through trusts can even protect them from legal disputes or premature access.

However, there are potential disadvantages. If assets are left directly to grandchildren, they may lack the maturity to manage large sums of money, risking its mismanagement. Trusts, while offering more control, can be expensive to set up and maintain. Additionally, family disputes over the allocation of assets may arise, especially if clear communication is not maintained during the planning process.

To overcome these challenges, clear documentation and open discussions with all stakeholders in the family are essential. This can help prevent future conflicts. In terms of financial instruments, working with a legal expert to set up trusts or other plans can help ensure that everything is in place, from tax-efficient planning to long-term management. Grandparents should also periodically review their plans to ensure they continue to meet the needs of their families as circumstances evolve.

Psychological and social aspects

Beyond financial considerations, the emotional connection tied to leaving a legacy for grandchildren cannot be overstated. Many grandparents view this act as a continuation of their life’s work, securing their family’s future. However, the expectations placed on grandchildren to honour the inheritance can create unintended pressures.

Families that engage in open communication and plan jointly with professional guidance tend to experience more positive outcomes, both financially and emotionally. Grandparents who take the time to explain their decisions and involve their children in the planning process help foster a shared sense of purpose, making the transfer of wealth smoother.

Ultimately, leaving assets for grandchildren is as much an emotional as it is a financial undertaking. However, with the right planning and the use of appropriate financial instruments, grandparents can ensure their legacy is not only protected but is also a source of lasting support.

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.