Much has been said about the comparisons between older generations and their younger counterparts. Philosophical debates over work ethic or feelings of entitlement among today’s youth may persist, leading some parents to reconsider leaving an inheritance to their children.
While some may feel that withholding an inheritance might force children to “make it” on their own, many retirees admit that their own successes are likely a mix of talent and luck combined with a myriad of economic forces beyond their control.
In the end, most parents desire to leave a lasting legacy for their children, and some may even want to transfer an inheritance while they’re still alive, meaning the Great Wealth Transfer may be sooner than you think for some clients. What are some practical considerations and potential justifications for when they don’t want to wait?
Benefits of Gifting Early
Some argue that there’s more joy in giving than receiving, and there’s something to be said for the joy of watching others benefit from your generosity. Just some benefits of gifting early include:
Watching Children Enjoy Their Inheritance
Many of the milestones in a client’s own life likely brought a sense of satisfaction: buying their first home, watching a child go off to college, paying for a child’s wedding or spoiling their grandchildren. Arguably, watching their children cross similar thresholds may bring equal or greater satisfaction than their own, and being there to see it — and being a part of helping it happen — may be motivation enough to distribute an inheritance early.
Guiding Children on Finances
Another benefit for parents is being able to advise heirs on how to manage their finances, whether that be guiding them through owning a home, simply setting aside an emergency fund or helping them establish a budget. While a child’s financial plan certainly shouldn’t be built on the promise of an inheritance, conversations around how to manage those funds prior to disbursement may help them form a solid footing.
Easing Financial Burdens for Children
There’s also a proud sense of duty in simply easing the financial burdens that some children may experience through no fault of their own. Such a scenario may be more probable in light of recent global events resulting in record unemployment, unexpected illness and more. Funds could also be leveraged to pay off medical debt or school loans, or be set aside for a grandchild’s education. In these situations, providing financial assistance sooner than later might help grown children avoid major financial difficulties and provide a foundation for future financial success.
Building Rapport with Next Generation
If your client is considering transferring wealth, it may be prudent to set up a meeting with those involved. This may be a win-win for you, your clients and their children. Not only can it present an opportunity for you to talk through ways children can maximize their inheritance through various financial strategies, it can also help build rapport, which is important.
You are likely well aware that once wealth is dispersed upon a client’s death, there’s a possibility that their heirs may not choose to use your services. Building relationships with family may help minimize this risk.
Gift Tax Considerations
Clients who are thinking about dispersing their wealth to children or others prior to their death will want to consider how they will structure the transactions to efficiently avoid paying unnecessary taxes.
Rather than gifting each child a one-time lump sum, a client may want to disperse an inheritance over the course of several years to minimize their tax burden. The current annual exclusion for gift taxes is $15,000 per individual, so a married couple with joint property ownership can give up to $30,000 per child annually.1
It’s important to note that paying tuition or medical expenses for someone, no matter the amount, is typically considered an educational or medical exclusion and is not taxed.1 Consulting with a tax professional is always advisable when considering any of these types of arrangements.
Planning for Lifetime Income
Generosity toward children is a noble endeavor but not at the risk of your client running out of money in retirement. It’s important to discuss strategies for withholding a portion of their wealth to meet their own living expenses. While Social Security provides some guaranteed income, most agree that it’s not enough to maintain their desired lifestyle in retirement.
An income annuity may help a client create their own pension, of sorts, and mitigate the risks of a Social Security shortfall. Some of today’s annuity products offer customized options that allow for flexible payment types, upside potential and the ability to withdraw benefits at any time while still protecting beneficiaries.
Relationships among parents and children can be complicated, but so can a client’s financial situation. Use our Elevate™ Advanced Planning Resources to help you navigate complex situations, including legacy planning, annuity strategies, rollovers, income planning and more.
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™
Marshall is CUNA Mutual Group's Advanced Planning Expert and has more than 25 years experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.
SOURCES1Internal Revenue Service, Frequently Asked Questions on Gift Taxes, Nov. 9, 2020.