Best way to divert home sale proceeds to my young kids...

[NJ_Native]

I've been a lurker here for 10 years. Just created an account and curious of your thoughts. Here is my dilemma: My wife and I have $1.5M in retirement and taxable accounts. We live very modestly and I am retiring at the end of the year (I am 41). We think the $1.5M is plenty provided our expenses are low and we use the 4% SWR. Moreover, we have pension that will hit later in life (45, 59, 70). I did the FIRE Calc and it says that we'll have plenty of money. So, my mind has shifted to estate planning.

I have 2 kids, 6 years old. I want to give them (tax free) money. My goal is to let them split $1M or $0.5M each at 18. I have a 529B for each of them, started at 1 YO that has $10K in it. I have a two GI Bills that were transferred to them for college so the 529B money is essentially gravy.

I am in the process of selling my last rental property (prepping for retirement). I may see $400K after the sale. This $400K is not calculated into out net worth. I read that an IRS tax code allows up to $70,000 single deposit (superfund) into a 529B for each child, by each parent. So, I'm thinking of funding $140,000 per child or $280K total into the 529B. Then, I would gift the IRS maximum of $14K per year, per child, per parent or $28K per year for each child until I reach the $0.5M.

So, starting now... Gifting $28K per year for 12 years (kids would be 18 YO) would be $336K, that money I would put into a taxable mutual fund account (in their name). Plus the 529B value of $150,000 (principal balance) would get me to the $0.5M for each child.

Does that sound reasonable? Has anyone done anything different for the kids/heirs?

 

[Koolau]

Can't comment on your proposed plan in terms of legality or whether it would work, etc. My caveat is that when the kids (and you, heh, heh) fill out the FAFSA form prior to going to Univ/College, the closer money is to the kids, the more it counts "against" them receiving grants/loans and possibly scholarships. Since you will be retired, you will likely have no earned income. So your "contributions" will be expected from your assets. They are treated much more gently than your income and WAY more gently (IIRC) than your kid's assets.

Now, it's been over 10 years since going through this exercise so I could be full of it. DO your own research and I would strongly suggest getting assistance from someone - perhaps a trusted CPA (maybe your tax guy/girl) OR I think there are paid "councillors" who help with this process. By the time your kids are old enough to use the money, you may be surprised at how much MORE it costs than now. We watched the prices, at the same school, for the same degree climb almost exponentially from kid to kid as they matured to matriculation. I think there are lots of pitfalls here and we on the forum are smart, generous of our time, and (often) informed. Still this will be on YOU, so get it right and get some help that will have a stake in it with you. That's my advice and I've told you WAY more than I know. YMMV

 

[REWahoo]

Have you considered the wisdom of giving 18 year-old teenagers access to $500,000 in spending money? Twelve years from now they may be very mature, well-rounded, and posses sound fiscal judgement - or they may blow it all in a few weeks.

 

[NJ_Native]

Agreed... Thank you for your comment. Yes. I am really hoping that I don't let them down and raise kids that would not appreciate such a gift. My work is cut out for me.

Honestly, the two other options are donate to charity or for us to spend like crazy in our golden years. I would prefer to give it to the kids. When I learned that I was going to be a father, my wish was to give them more than I had growing up. My mother was a single parent, raised 3 kids, and we had almost nothing. There was hard times when I was a kid. That taught me to be frugal. Frugal to a point where I just got a cell phone. Even now, when we have almost $2M in assets, I still clip coupons and use groupon.

So, just trying to do the correct estate planning.

 

[jollystomper]

Agreed... Thank you for your comment. Yes. I am really hoping that I don't let them down and raise kids that would not appreciate such a gift. My work is cut out for me.

The challenge is not just how you raise them - it is how much they get influenced by peers, which at 18 is going to be a tremendous challenge. Once others find out about it can be tough to fend them off. As an example, look at the young athletes who get big, even moderate money in their late teens or early 20s, and the financial failure rate that occurs.

I do not much about them, but if you really want to leave them a windfall maybe a trust that starts at a particular age and pays out money periodically would be a better bet than providing access to a lump sum.

 

[REWahoo]

... if you really want to leave them a windfall maybe a trust that starts at a particular age and pays out money periodically would be a better bet than providing access to a lump sum.

+1

Another option is to delay any transfer of money to them until they demonstrate both the need and ability to manage the funds themselves. And as hard as it may be for you to believe, they may have children of their own some day. By then you might think it more important to assist your grandchildren than give your kids money. I know our two adult daughters were really happy when we funded our five grandchildren's 529 accounts.

Also, life has a way of throwing twists and turns at you over time. A lot can happen to you financially between now and when your kids turn 18. Although you don't see a need for that "extra" money now, a serious illness or other unforeseen event can change that in a heartbeat.

Bottom line, rather than transferring money now, consider keeping your options open until they become adults. Hopefully you will have been able to grow that $1M to a tidy sum, navigated the next 12 to 15 years in good physical and financial health, and gain some insight into when and where your kids could best use the money. In all likelihood your kids will be better able to use and appreciate that money in their 20's rather than getting a windfall at 18.

 

[ChiliPepr]

you have about $1.9 Million ($1.5M+$400k) and withdrawing $60k/year, in 12 years how much do you think that nest egg will be?

If you will be taking $1M out for the kids, that will cut your saving about in half and you will only be 53. At that point your kids may have more than you do.

 

[NJ_Native]

Rewahoo. Yes, "holding the money (in my name) until they are 20 and seeing what kind of people they will be", was my plan. So, if they are earnest and wonderful kids and I decide to move forward with the idea, getting them more the $28,000 per year creates a taxable event.

Hence the dilemma... I can't figure out how to give them (tax free) money that doesn't involve a decade of coffers stuffing. Seems like I have to start now and assume they'll be good people. The 529B will be in my name and can always be revoked, if necessary. I can add myself to the (taxable) mutual fund account as a custodian, and pull it back, if needed.

Otherwise, my death would allow them to get the money. I should be under the $5.4M death tax. Maybe not.. FireCalc said that I would have $8M at the end.

The living trust is a good idea too... I have heard that they can be expensive. Turning over the money at 25 YO would be great too, after college graduation.

 

[pb4uski]

While both of my kids are financially responsible, there is no way that I would give them hundreds of thousands of dollars at 18... or even now at 28 and 33. Besides, you may need that $400k someday.

While you don't disclose how much your annual spending is, $1.5 million is not a lot for a married couple retiring in their early 40s. Many here would not be comfortable retiring on so little.... even with pensions coming on line later.

Invest the $400k and you can always give money to your kids later once it becomes clear that you will not need it. You'll have more flexibility. What if, God forbid, one of them gets hooked on drugs after they turn 18... it happens in the best of families.... and because they have a huge stash that you have so generously provided you enable them and can do nothing about it. While your kids are really young now, one of the things you will learn is how little real control you have over them as they get older.

I've never been a fan of 529s either. DS decided not to go to college so if I had a bundle in a 529 it would be stuck there since he is the youngest.

And finally, you are worrying too much about gift taxes... you can give over $14k ($28k for a married couple) annually and not pay gift tax.... you just have to file a return and keep track of how the gifts tally towards your $5.4 million total. So keep the $400k and if when they are adults you decide to make a big honking gift to them then go ahead and just file a gift tax return.

Gifts over $14,000 are considered taxable gifts and must be reported on an annual gift tax return, Form 709. Though you must file, you do not have to worry about paying the federal Gift Tax because you can offset the tax by using the unified gift and estate tax exemption. Any federal gift tax assessed on your lifetime gifts will be tallied and subtracted from the combined unified gift and estate tax exemption after you die. The combined unified gift and estate tax exemption for 2017 is $5.49 million (up slightly from $5.45 million in 2016).

Read more: http://law.freeadvice.com/tax_law/gift_tax_law/gift.htm#ixzz4k0QcJ1oZ
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[NJ_Native]

Lol... Yes. I calculate that I would hardly touch the nest egg ($1.5M). We have 4 pensions kicking in after retirement (2 military retirements ($7,000 per month combined) plus 2 social security ($6,500 per month combined). Plus the bull market...

 

[REWahoo]

One other thought: you can always start the $28K per year gifting when they are adults. It will likely be a much higher number by then and there is much to be said for a stream of income vs. a lump sum, especially as a young adult.

 

[NJ_Native]

Hi.. Thanks. Annual spending is $73.9K when I sell the house, it'll drop to $46.3K. Nest egg (excluding home sale) is currently 20 times expenses not including futire pensions. When the house sells, I'll be at 31 times expenses.

 

[Blue Collar Guy]

Rewahoo. Yes, "holding the money (in my name) until they are 20 and seeing what kind of people they will be", was my plan. So, if they are earnest and wonderful kids and I decide to move forward with the idea, getting them more the $28,000 per year creates a taxable event.

Hence the dilemma... I can't figure out how to give them (tax free) money that doesn't involve a decade of coffers stuffing. Seems like I have to start now and assume they'll be good people. The 529B will be in my name and can always be revoked, if necessary. I can add myself to the (taxable) mutual fund account as a custodian, and pull it back, if needed.

Otherwise, my death would allow them to get the money. I should be under the $5.4M death tax. Maybe not.. FireCalc said that I would have $8M at the end.

The living trust is a good idea too... I have heard that they can be expensive. Turning over the money at 25 YO would be great too, after college graduation.

Your not really restricted to the 28k a year. I went thru this with my mother. She sold her home and wanted to give away chunks of money to us children. It seems you can gift more, wayyyy more. You just need to fill out a form at tax time telling the tax man that you gave lets say 500,000 to each kid. The form then becomes a record that instead of you allowed to give lets say the 5 million per person estate tax gift free, you now are only allowed to give 4.5 million. No one owes any taxes. I talked my mother out of this idea because if i drop dead and she is still alive and runs out of money i dont trust my sisters to take care of her. I think they will spend moms money like drunken sailors and put my mother into a "home". Instead of mom having an aide(she calls her her private nurse), taking care of her 24/7 that she pays for.

 

[NJ_Native]

Oh. I see. Thanks for the quote. I was reading it wrong. It's an offset. Ok. So, you can give your kids anything under $5.4M in your lifetime and it won't be taxed. Anything over $14K per year needs to be filed and anything under doesn't. And, filed doesn't necessarily mean taxed. Got it...

 

[REWahoo]

Oh. I see. Thanks for the quote. I was reading it wrong. It's an offset. Ok. So, you can give your kids anything under $5.4M in your lifetime and it won't be taxed. Anything over $14K per year needs to be filed and anything under doesn't. And, filed doesn't necessarily mean taxed. Got it...

I think this needs to be researched to be sure it is completely accurate.

 

[haha]

Hi.. Thanks. Annual spending is $73.9K when I sell the house, it'll drop to $46.3K. Nest egg (excluding home sale) is currently 20 times expenses not including futire pensions. When the house sells, I'll be at 31 times expenses.

You clearly want to do this. Experienced and level headed people have pointed out possible downsides. The advantage of freedom is that anyone can do whatever legal thing they please, and let natural selection sort it out.

Ha

 

[Blue Collar Guy]

Oh. I see. Thanks for the quote. I was reading it wrong. It's an offset. Ok. So, you can give your kids anything under $5.4M in your lifetime and it won't be taxed. Anything over $14K per year needs to be filed and anything under doesn't. And, filed doesn't necessarily mean taxed. Got it...

Yes correct, its an off set. The feds have about a 5 million per person amount, my state at the time had a 2.4 million. so just check out your state.

 

[audreyh1]

One other thought: you can always start the $28K per year gifting when they are adults. It will likely be a much higher number by then and there is much to be said for a stream of income vs. a lump sum, especially as a young adult.

Right - that's what I would do. Invest the money, and then at some point in time in the future you can start gifting at the max rate allowed by the gift tax. The gift exemption goes up every few years, doubles if you and your wife make the gift - which means it needs to come from a joint account or each of you needs to gift separately.

So you could jointly gift at least $28K per child, or $56 total per year.

These gifts would not count against your estate lifetime gift exemption.

 

[NJ_Native]

That's a great idea... I'll slowly gift it after they demonstrated their humanity. I'm glad to learn that I don't have to do it year-by-year for 12 years.

 

[GrayHare]

In my array of friends I know of two who were given a similar amount of money, one at age 18 another (via trust) at 35. The 35 year old attended college, got a degree, found a responsible job, and has a family. The 18 year old also attended college, but never felt the need to work, blew through the money during his 20s, became homeless, and died alone at a young age.

 

[pb4uski]

Sad.

 

[iloveyoga]

My personal opinion...giving kids too much of anything does not benefit them in the long run. That is how we all learn and grow and there is nothing like necessity as a good teacher. We have helped our grown kids and I have money saved for the grandkids but it is very modest and won't change the way they live their own lives. What do you say on here...YMMV?

 

[OldShooter]

OP: You need a CPA or an estate planning attorney to help you sort through the options. Getting a bunch of random opinions gleaned on the internet is not a wise way to manage serious money in a tax-efficient manner.

Also, remember that at 18 years the human brain is not yet mature. IIRC, judgment skills are some of the things that are still lacking. I vote, with the others, against the part of your plan that gives them a lot of money at that age. One technique that is common is to distribute the corpus of a trust in fractions at specific ages. Like 25% at age 25, 50% of the current balance at age 35, and the remainder at age 45. Trusts can also protect against legal judgments, divorce issues, etc.

 

[Walt34]

Also, remember that at 18 years the human brain is not yet mature. IIRC, judgment skills are some of the things that are still lacking. I vote, with the others, against the part of your plan that gives them a lot of money at that age.

I have to agree. I seriously doubt that my 18-year-old self would have been a wise steward of a large amount of money and I had to learn (the hard way of course) the high value of delaying immediate gratification for long-term gain.

 

[euro]

In my array of friends I know of two who were given a similar amount of money, one at age 18 another (via trust) at 35. The 35 year old attended college, got a degree, found a responsible job, and has a family. The 18 year old also attended college, but never felt the need to work, blew through the money during his 20s, became homeless, and died alone at a young age.

Oh wow, that's very sad! But it does illustrate the problem well: there is no possible way to know what your 6-yo will be at age 18. Sure you do your best to bring them up to be decent, well-rounded adults, but as others have said, when it comes right down to it, you have frighteningly little influence at the end of the day. Once they reach their teens, they start orienting themselves toward friends, peers, anything but their parents. Well, yes, there may be a few exceptions of late-bloomers, but don;t bank on the hope yours will be those exceptions