How to pass on the nest-egg

[donheff]

Laurence posted a question about how many are expecting an inheritance and how they deal with the issue. I often think about the reverse situation. When my mother died I got a whopping $6K and bought a jet-ski. But, if things go as expected, our two kids will get a big pile of money from us. I caution them to plan on covering their own ER - just in case - and DS (now 33) is socking away maximum amounts. DD is still in college so we will see how she does.

At any rate, we probably won't kick the bucket until the kids are in their mid 60s and 50s respectively. In many future scenarios DW and I will bumble along living a good life and leave a nice estate at death. But in many other scenarios we will amass a big sum of money and in our mid 70s will conclude that we no longer have to worry about SWRs and the like. So, if we have funds to burn do we distribute some to the kids to advance their ER dates? As I understand the tax laws, we can give them $10K/year without tax implications - but that doesn't do much for ER. But I also understand that we can give them up to the estate tax limitation at any time without a tax hit (on them, clearly taxable on our side). I am curious about what young dreamers and old geezers think about this. Fund the kids ER - with a lump sum or a pseudo annuity? Don't fund it until you die? Fund it if they have been frugal and sensible themselves?

 

[MooreBonds]

As I understand the tax laws, we can give them $10K/year without tax implications - but that doesn't do much for ER. But I also understand that we can give them up to the estate tax limitation at any time without a tax hit (on them, clearly taxable on our side).

Current gift tax is $12k/year/person gift-tax free.

You are correct about using up some of your estate tax exemption while still alive. However, if you use part of your gift tax exemption while still alive, it would be tax-free to both the recipient and the

 

[Khan]

I think if you directly pay medical and educational expenses, it's not counted with the gift tax amount.

 

[donheff]

I was a little quick to denigrate the gift-tax exemption. Each of us could give each kid $12K (in today's dollars). $24K/yr COLAd is a pretty nice supplemental annuity without any impact on the estate limitation. Toss in tuition for the grandkids (if any), per Khan's suggestion, and they could advance ER substantially. Well, they can't count on those chickens until they hatch.

 

[SteveR]

We plan to passing the nest egg through our Trusts; if there is anything left.

My calculations, projections, prognostications, and the result from my crystal ball say we will not out-live or out-spend the pile. Our downsizing plans will assure we have lower expenses over most of our ER. So, the kids will likely get enough to have to see a tax advisor but the trust is designed to reduce the taxes as much as is legally possible.

We have already started some "gifting" by giving away a car to my SIL and funding 529 accounts for the grandkids to date. My kids are going to have to learn how to dial a phone or remember where I live before much gifting will take place. I paid most of their college expenses (still do for younger kid) and got them both started with cars (helped the out; not buy them a car). Gifting is a possibility and will be much more frequent in later ER when IRA distributions hit. The minimum distributions will far exceed our projected expenses so I would rather give it to family than to strangers.

 

[Alex]

Do yourself and your kids a favor - DIE BROKE.

 

[wabmester]

I've calculated that by the time our kid graduates from college, we'll have spent something like $300K to raise her. I'll probably create a family trust to fund the education of any kids in the family who need it, but I'm not sure I want to do much more than that. Maybe a venture capital fund for family members? But no entitlements.

 

[Hamlet]

I'm 34 and hope to FIRE by 50 if all goes well. I don't expect that there will be much money coming to me from my parents. They are only semi-prepared for retirement (they're still working at age 52), and they hopefully have a lot of years yet to spend down their money. My mother gave 5K to each of the kids after my grandfather passed away because she felt he would have wanted her to. It made me a little uncomfortable to take it, but she was right. My grandfather would have been very happy to see us get it.

I don't think large transfers of wealth between generations are normally the best plan. The Millionaire Next Door really made me question the wisdom of passing money down the generations beyond tuition and perhaps a downpayment on a house. I hope to have kids in the next couple of years, so that may change my mind

 

[SecondCor521]

A couple of notes:

The medical and education loophole - I'm pretty sure this has to be paid directly to the school/hospital. If you give it to the individual it counts against the annual gift tax exclusion.

You can give $12K per year per donor recipient pairing. So if Mom and Dad want to give some money to their child and child's spouse, they can give $12K x 4 = $48K per year.

Funding 529 plans - one can gift up to five years worth of giving in a single year per recipient. So if you had three grandkids, you could gift $12K x 5 x 3 = $300K in a single year. I think this means in year 2 through 5 you can't gift again, but it could be an effective strategy near the end of life.

donheff, if you give more than the annual gift tax exclusion, you can elect to count it against your lifetime unified tax credit (can't recall the right term here, but there's an IRS form for it), such that nobody pays taxes now, but it would reduce the exclusion for the giver's estate.

2Cor521

 

[macdaddy]

My parents started to pass on their wealth to me after I finished school. I am naturally very cheap and frugal so maybe that influenced their decision. In any case, I look at the money as savings for them in case they need anything and as savings for their grandkids. It didn't make me want to work any less hard, although who knows, it may have encouraged me to take more professional risks. If you're 70s or 80s and can't trust your kids, you may have more problems than just how to get rid of your cash. Setting up educational funds for grandkids sounds like a great preliminary step.

 

[Nords]

If you're 70s or 80s and can't trust your kids, you may have more problems than just how to get rid of your cash.

Well, if they're choosing your long-term care facility then they'll probably quickly solve all those problems at once. Yikes.

Setting up educational funds for grandkids sounds like a great preliminary step.

That seems pretty popular, but if one of my grandparents had given me a full college scholarship then I'd still be trying to apologize to them for the results (or lack thereof).

I agree with Warren Buffett that you should give your kids enough money for them to do anything, but not enough for them to do nothing.

I have no idea what the next step should be. I like the idea of funding our local Institute for Human Services (food bank, homeless shelter) and Rabbit Kekai's surfing foundation. Other'n that it seems like too many nonprofits are either too corporate (with too much overhead) or too poorly focused. I've seen what happens to a small non-profit ($35K/year expenses) when a large donation comes in $25K) and it could get scary without the right people in charge. We just haven't found a purpose to get passionate about giving someone $10K/year.

Another issue-- anyone know how to donate anonymously to an eligible charity and still be able to take a tax deduction? I suspect that I'd have to choose one or the other.

 

[FinanceDude]

Best way is a trust to take advantage of the unified credits and such. Plus, you can put language in so your kids don't get the money too early..........

Maybe: $200K at age 25
$500K at age 35
The rest at age 50..........

 

[wabmester]

Another issue-- anyone know how to donate anonymously to an eligible charity and still be able to take a tax deduction? I suspect that I'd have to choose one or the other.

I do it all the time. Most charities just give me a blank receipt in which I fill out the name and value (if I donated stuff rather than cash).

If you want to do it with big bucks, create a charitable trust, get the write-off at trust creation time, and then the gifts are made by the trust.

 

[Nords]

I do it all the time. Most charities just give me a blank receipt in which I fill out the name and value (if I donated stuff rather than cash).

Good point-- I have a large stash of blank Goodwill receipts on hand for "tax emergencies".

If you want to do it with big bucks, create a charitable trust, get the write-off at trust creation time, and then the gifts are made by the trust.

Yeah, I guess that's how Fidelity gets away with charging money to run their donor-advised funds. There just doesn't seem to be a cheap/free way to give out money without getting your mailing address on everyone else's lists.

 

[donheff]

I agree with Warren Buffett that you should give your kids enough money for them to do anything, but not enough for them to do nothing.

I generally agree with that as well since I met a few unhappy trust fund babies who became dissipated drug addicts in the 60s/70s. Thus we set up our wills to hold off full access until the kids were in their 30s. But when do you call a halt to that? After all, this is an ER board. We lionize individuals who pull the plug at an early age. Doesn't it make sense to help our kids achieve same? Or do most of us subscribe to the "do it the old fashioned way, earn it" philosophy? For my part, if DD chooses to enter a profession that won't build a huge nest egg (e.g. teaching -- yeah, I remember the threads about how ludicrously overpaid they are ) I would like to enable her to ER in a decent fashion by age 56 like me. DS has already chosen a profession that should enable him to bail on his own but if universal health insurance never gets resolved, I won't mind funding a policy in his mid-50s -- if things still look rosy by then.

 

[wabmester]

We lionize individuals who pull the plug at an early age. Doesn't it make sense to help our kids achieve same?

Have you asked your kids? Personally, I'd enjoy the fruits of my own labor more than the fruits of my parents' labor. I liked the journey. I like the self-made bit.

If my parents were to offer me a windfall, I'd first encourage them to enjoy it themselves, and then maybe I'd work with them to set up a foundation to carry on whatever legacy they found appropriate. Maybe an ER fund for Japanese buy-and-holders?

 

[kcowan]

We have been struggling with the same issue. On the one hand, our money might run out by age 97 (or earlier in the event of a major illness like Alzheimers or cancer) but if we keep making superlative returns like the last 4 years of retirement, we might have $20 million left and then would have the same problem.

We're thinking of gifting plus setting up a trust if we should be so fortunate and naming the heirs as joint trustees. It would support advanced educational institutions (we have three among us as alumni) as well as selected charities that have high payout ratios. The idea is to get them engaged in giving while they are still young enough to become committed to it.

Keep the ideas coming. Thanks.

 

[donheff]

Have you asked your kids? Personally, I'd enjoy the fruits of my own labor more than the fruits of my parents' labor. I liked the journey. I like the self-made bit.

We haven't discussed it in detail - probably still too young for that. In general terms, both kids express the view that we should blow it on ourselves and they will take care of themselves. I too like the fact that I worked during school and never had to rely on anyone. We did not spoil the kids - they both worked during school and are not spendthrifts. And the fact is, DS is doing fine and DD will probably follow suit. But I look at the costs of DS' house (nearby in DC), the absence of defined benefit plans (like my Fed pension), the continuing failure to deal with health insurance and I worry that they won't be able to achieve what we have regardless of hard work and frugal ways. Thus the concern about potentially helping out.

We're thinking of gifting plus setting up a trust if we should be so fortunate and naming the heirs as joint trustees. It would support advanced educational institutions (we have three among us as alumni) as well as selected charities that have high payout ratios. The idea is to get them engaged in giving while they are still young enough to become committed to it.

That would certainly be a pleasure. If Moore's law's impact affects bio-tech, nano, and quantum computing and the market just goes up, up, and away, we will do the same.

 

[Tracy42]

We have set up a Roth IRA for our daughter. We had a vacation rental property, and she was kind enough to be our model (snapped a pic of her on the balcony) for our website. We started her off when she was 6. Since then we sold the condo, but she has moved over into employment in my husband's business--she's 8 now, capable of shredding papers, opening mail, and the like. I see us doing this as long as we have the business, then we would probably fund the Roth to match any income earned through part-time jobs through high school/college.

I struggle with the idea of dis-incenting her to achieve by being too generous with the money, but the total amount of our contribution will be so small to make her a millionaire many times over--tax free, that it just seemed crazy NOT to do it. I guess we will have to trust that she will be level headed and work extra hard to teach her about saving and investing.

The down sides are that she owns the $$ when she turns 18 and I'm thinking it will count against her for financial aid, but the reality is we were not going to get much if any financial aid anyway. Again, the potential to pass along real wealth with a minimal investment seemed too good to pass up.

 

[CCdaCE]

Yeah, contributing to your child's RothIRA was going to be my suggestion too.

I don't know if that is included in the $12k/year limit?

Max. to give 'em is $12k + $4k into their Roth? How would anyone ever know?

I guess that way, you can be more sure they'll use it for their retirement, but on the other hand, there's nothing preventing them from cashin' it out and taking the penalty hit.

-CC

 

[Martha]

Yeah, contributing to your child's RothIRA was going to be my suggestion too.

I don't know if that is included in the $12k/year limit?

Max. to give 'em is $12k + $4k into their Roth? How would anyone ever know?

I guess that way, you can be more sure they'll use it for their retirement, but on the other hand, there's nothing preventing them from cashin' it out and taking the penalty hit.

-CC

The 12,000 exemption includes any money put into a Roth. It doesn't include medical or educational expenses paid directly to the provider.

 

[Nords]

The 12,000 exemption includes any money put into a Roth.

I would've thought that the Roth was earned income and the $12K gift was unearned income... two mutually-exclusive types of income.

 

[donheff]

I would've thought that the Roth was earned income and the $12K gift was unearned income... two mutually-exclusive types of income.

I think in the OPs case you are right since they paid their kid for work done in the business. Any of that money that went into the Roth would be the kid's earned income. But other posters suggested that if you kid works for others you can pay the equivalent amount into a Roth while the kid retains all the earnings (I did that for DD last year). That equivalent was a gift from me to her.

 

[kaudrey]

We lionize individuals who pull the plug at an early age. Doesn't it make sense to help our kids achieve same?

-----

Well, my parents retired early. I plan to retire early, without any of their money. I hope they die broke and happy many, many years from now.

But...they DID help me. More than I'll ever be able to thank them for. They showed me by example that a middle-class, single-income family with 2 kids can LBTM, save their money, enjoy life (they even built us a pool!), and retire at 57.

My parents are now 70, and yes, they plan to leave my sister and I whatever they have left. But I plan to retire before that happens and without factoring any inheritance into the equation. My sister and I both LBOM and save plenty of money because that's what we grew up with. I will probably donate much of anything I get from my parents.

Helping your kids to ER doesn't have to be monetary.

 

[cute fuzzy bunny]

Our gift to gabe is to try and not become a burden on him when we're older. Financially or otherwise.

Past that, he'll get a car, a college education, and i'll help him buy a house or start a business if the time is right and the opportunities look good. Then when we pass on and he's in his 40's and his life is largely set, he can have the rest. I imagine the options for passing the money along tax-smartly between now and 2050 will be variable and interesting...