Gifting Inheritance

[Larry Ragman]

My wife is inheriting a modestly large estate. We intend to gift a significant portion to our adult children. They are productively employed and well adjusted, in their mid to late 20s, and currently single. I plan to have a discussion with each of them individually about how this could be game changing money for them. I’m interested in how others would approach this situation.

1. Assuming multiple six figures to each of them, how would you advise they invest/spend it? My working plan is to suggest they put 90% in a total stock market index fund and keep 10% for fun, expenses, or just emergencies.
2. Just give it to them or put the money in a trust for them?
3. From a tax perspective, is there a better way to give them the money than just gift it and file the gift tax returns? We thought about $32k a year to each but decided it would take too long. Any other thoughts?

Any insights or comments appreciated.

[Hatton]

Sorry for the loss. Nice problem tho. If you think they are mature enough to handle the money I like option 1. Otherwise option 2.

[JBME]

what a wonderful gift for your children. You mentioned "advise" in Number 1 which I think is fine. All you can do is advise but if they disagree with your advice and/or just don't do what you suggest while telling you they would don't get too upset with them. For instance, do they have homes? Do they desire homes? They might want to take the money and put it towards a down payment (in which case you probably would suggest they don't invest it)

[Tim]

Actually there is no single answer.

• What does your wife want? (And you)
• Mid 20’s, what is best short term/LT for each?
• Conceptually, I would prefer the message of living within their means, but providing some relief. On a personal budget level, investing it and funding retirement savings at 20% removes a drag on their spending. Using it for a 10% of a house down payment (with the other 10% saved) would be reasonable. Let the remaining grow as retirement savings. You want them to invest for the long term and live within their means. At the same time, make it a little easier.
  I would strongly discourage using funds for supplemental living expenses or money to “blow” like the 10%.
• Gifting makes sense tax wise.
• The silver lining is “what if” each decides to just keep it invested in one low cost broad index fund and never touches it? I think you and mom would be surprised. Give them a chance for some input . You might like their plans.

[Larry Ragman]

Thanks for the thought so far.

Hatton thank you. The loss was my SIL. Sad, but she was always good to our kids and they stayed in touch with her so this path seems appropriate. The kids are mature so I do think it would be ok for them to control the money.

JBME agree if we gift it to them directly advise is all I can do. Good point on flexibility. I have focused on long term as the core of FI, but concede they may prefer to redeploy to down payment on a house or some like that. That would be OK. (Though we are sort of mentally committed to a separate gift of a down payment when the time comes.)

Tim good thought on the discussion points. Part of this whole process is to give them an early bite of the apple and help them make good financial choices now and in the future. As I have said before I expect them to inherit whatever is left, which may be a lot. I’ll think a bit more about the 10% “blow it” fund.

[StarTrekDoc]

Sorry for your loss.

What does your wife say? It was her sister, right? That's the primary driver IMHO.

The how is tax efficiency questions with whatever advice wisdom you can attach to the dollars.

Questions on taxes and pots.

IRA dollars? Transfer the iIRA to them and advise stretch 10years.

GKids? Advise 529. This where aunt would have loved to see and helps you help kids too with kid education funding .

House. I think this is a biggie especially in today's environment. Getting into the market is key if you want to be in the market, otherwise you're on the sidelines. Having the down really helps getting into the right one for them and stay there instead of 5-8 year flip where interest rates probably will be in 1970-80s range.

Splurge ancestry trip to SIL origins for family would be a nice capstone too

[Anne]

The most difficult part of this, if they are looking for a relationship, and particularly looking to get married at some point, will be how to ensure they are not getting taken advantage of by a potential partner, while at the same time not turning off a great potential partner. I’ve seen people in their late 20s/early 30s come into large sums and any of the following can happen:
1. They either signal that they are well off or let it be known too soon in a relationship and attract gold diggers
2. They meet someone great who isn’t after the money but their parents get too controlling in how the money is utilized, what type of house they should buy, etc, and the partner feels marginalized and decides the relationship isn’t for then.
3. They meet someone great but who one of the parents doesn’t think is good enough and the money is used as a control factor, tarnishing the relationship.

Inheriting multiple 6 figures in late 20s though is such a great help, your kids are very lucky.

[JBME]

The most difficult part of this, if they are looking for a relationship, and particularly looking to get married at some point, will be how to ensure they are not getting taken advantage of by a potential partner, while at the same time not turning off a great potential partner. I’ve seen people in their late 20s/early 30s come into large sums and any of the following can happen:
1. They either signal that they are well off or let it be known too soon in a relationship and attract gold diggers
2. They meet someone great who isn’t after the money but their parents get too controlling in how the money is utilized, what type of house they should buy, etc, and the partner feels marginalized and decides the relationship isn’t for then.
3. They meet someone great but who one of the parents doesn’t think is good enough and the money is used as a control factor, tarnishing the relationship.

Inheriting multiple 6 figures in late 20s though is such a great help, your kids are very lucky.

I couldn't agree with this more. All of this could happen and would be out of the control of the parent. I would hope the children don't mention this particular financial relationship until engaged (though talking about money and saving in general is an important conversation to have prior to an engagement). Personally my plan, whether we have too much when retired and/or get inheritances from parents when we're in our 50s/60s and thus don't need the money, would be initially to just gift to the gift tax limit so I don't have to file a form. Do that for a few years. Then consider bigger gifts depending on my own portfolio and/or how the kids are doing in their life journey

[Tim]

One option:
Hold it for the kids until they need it. It grows and grows. Sometimes they actually leave it. The mere fact that they know it is there can actually raise their sense of responsibility. The good problem is simply that if it grows 200% eventually you need to have some taxes figured out. In your case, a gift waiting to be claimed and LTCG taxes paid by dad and mom is like a roth to them.

[Tangler]

My wife is inheriting a modestly large estate. We intend to gift a significant portion to our adult children. They are productively employed and well adjusted, in their mid to late 20s, and currently single. I plan to have a discussion with each of them individually about how this could be game changing money for them. I’m interested in how others would approach this situation.

1. Assuming multiple six figures to each of them, how would you advise they invest/spend it? My working plan is to suggest they put 90% in a total stock market index fund and keep 10% for fun, expenses, or just emergencies.
2. Just give it to them or put the money in a trust for them?
3. From a tax perspective, is there a better way to give them the money than just gift it and file the gift tax returns? We thought about $32k a year to each but decided it would take too long. Any other thoughts?

Any insights or comments appreciated.

Sorry for the loss.
1. I like total index fund for 90% idea
2. I don’t know enough about trusts, but that might be a good way of keeping them from wasting it if that is a temptation and it may also have some tax advantages (i would consult attorney & cpa)
3. not sure

[Larry Ragman]

StarTrekDoc yes, her sister. The gift is actually my wife’s idea. SIL no valid will, but she left notes on what she wanted and it is reasonably clear she wanted our kids to get this money. (No kids of her own or other family aside from my wife.) Yes selling a house is a big part of it, but there is also some other money. No IRA or other retirement accounts though. Agree on family trips. We are already planning some, but we’ll cover that outside this gift.

Anne this is very perceptive, thank you. My wife is very sensitive to the issue of how the gifts might affect relationships but she and I haven’t talked about it in this context. Our kids are both actually just out of reasonably serious relationships and taking a break, but your comments reinforce the notion we need to talk with them about new relationships and money as part of the gift.

JBME I hear you on the multi year gifting. But part of the intent here is for them to learn. And another factor I suppose is that I don’t want to be parsing this money out over 10 years. They know there is likely an inheritance coming from us, but I like to think that is 25-30 years down the road. This gives them a shot at their own FI if they can keep it invested.

Tim we thought about holding on to it for them. That still might be the smart play, but we are hopeful that they are well enough grounded they will listen to our counsel and make good choices. I think our answer is biased a bit by a desire to help them build wealth that they control and not be “beholden” to parental purse strings.

[Larry Ragman]

Sorry for your loss.

What does your wife say? It was her sister, right? That's the primary driver IMHO.

The how is tax efficiency questions with whatever advice wisdom you can attach to the dollars.

Questions on taxes and pots.

IRA dollars? Transfer the iIRA to them and advise stretch 10years.

GKids? Advise 529. This where aunt would have loved to see and helps you help kids too with kid education funding .

House. I think this is a biggie especially in today's environment. Getting into the market is key if you want to be in the market, otherwise you're on the sidelines. Having the down really helps getting into the right one for them and stay there instead of 5-8 year flip where interest rates probably will be in 1970-80s range.

Splurge ancestry trip to SIL origins for family would be a nice capstone too

Oops, I originally misread your point about the house. Yes, I agree using the money for a down payment would be perfectly appropriate. Realistically though, neither is at that point. Not in relationships; not really settled in one place. But if they pulled the money in a few years for a down payment that would be ok.

[StarTrekDoc]

It is a good test for them to see some dollars early and to see if they are responsible for the larger shot in arm 30-50+ years from now or need to reorient your own estate plan if not (hopefully not so).

[White.Beard.Doc]

I would be careful about gifting too much money at early adulthood. In particular since they are not yet married. I might hold onto the money and tell them something along the lines of being able to help with major life events. And I would help with those types of things assuming that the kids are on a good path, working, productive, having learned how to appropriately be a steward to financial resources, as in learning how to invest.

Things I might consider supporting:
Paying off student loans
Purchasing a new car
Starting an investment account together with them and challenging to learn enough about finances to invest wisely
Paying for a wedding celebration
Helping with a downpayment on a house

At the same time, it is important to maintain healthy boundaries. Don't try to use the money for control, unless one of them is seriously off a reasonable life path. Let them be adults. One of the best gifts we can give to our kids is letting them learn how to manage their own life on their own terms with their own financial resources. Once they have done that in a practiced and solid fashion, then sharing the wealth is ok in my view.

[FIREshrink]

My wife is inheriting a modestly large estate. We intend to gift a significant portion to our adult children. They are productively employed and well adjusted, in their mid to late 20s, and currently single. I plan to have a discussion with each of them individually about how this could be game changing money for them. I’m interested in how others would approach this situation.

1. Assuming multiple six figures to each of them, how would you advise they invest/spend it? My working plan is to suggest they put 90% in a total stock market index fund and keep 10% for fun, expenses, or just emergencies.
2. Just give it to them or put the money in a trust for them?
3. From a tax perspective, is there a better way to give them the money than just gift it and file the gift tax returns? We thought about $32k a year to each but decided it would take too long. Any other thoughts?

Any insights or comments appreciated.

If you're worried about the lifetime exemption then $32k each is still better; invest the rest and at least get the step up in basis and use trusts as needed.

It is likely good for your kids to receive inheritance in trust to protect from future spouses and creditors.