Gifting Inheritance

[JBME]

Not that this is you, Larry, but it’s hard to predict the future. I’m influenced by the fact that my parents aren’t fans of my wife. Things changed for the better a few years ago but it was rough for 10 years or so. During that time we were paying off my wife’s med school loans. My parents felt that was 100% her responsibility. Our house was ours since we got that together in their view.

So when they gave money or gave me money when my grandmother died (they said it was my inheritance but I have no idea) they wanted to know what I was doing with it. I told them it was going to the mortgage every time. It was a lie because it’s a much more financially better decision for the family to get the student loans paid off first. But they would have been upset to the point of using money even more to be controlling if I told them it was going towards the student loans. By any measure my wife and I were responsible and held jobs continuously after finishing post-college education. I have no regrets lying to my parents about this. Not sure if that makes me an okay person or not. Just saying it’s possible your child might marry someone who is responsible but had hundreds of thousands in student loan debt. How would you feel if these gifts went to pay that off? What if they divorced not long after the debt was paid off? Just posing bad case scenarios. This is why when I get to my point in life where you are I hope I can be of the mindset that this money giving can help people but I need to emotionally let it go and be okay with whatever follows. Especially if it’s money you truly don’t need, then you need to be okay with that bad case scenario I presented

[Larry Ragman]

If you're worried about the lifetime exemption then $32k each is still better; incest 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.

Not too worried about the lifetime exemption per se. We still have headroom there. But the $32k per year certainly sidesteps that issue so we will have that discussion with the kids before making a final call.

I actually agree on the trusts, but we’ll probably wait on that as a strategy until we are moving more money to them. I also have a personal reluctance to drop a lot into irrevocable trusts, which is what is necessary asset protection. No doubt I’ll eventually overcome that.

[Larry Ragman]

Not that this is you, Larry, but it’s hard to predict the future. I’m influenced by the fact that my parents aren’t fans of my wife. Things changed for the better a few years ago but it was rough for 10 years or so. During that time we were paying off my wife’s med school loans. My parents felt that was 100% her responsibility. Our house was ours since we got that together in their view.

So when they gave money or gave me money when my grandmother died (they said it was my inheritance but I have no idea) they wanted to know what I was doing with it. I told them it was going to the mortgage every time. It was a lie because it’s a much more financially better decision for the family to get the student loans paid off first. But they would have been upset to the point of using money even more to be controlling if I told them it was going towards the student loans. By any measure my wife and I were responsible and held jobs continuously after finishing post-college education. I have no regrets lying to my parents about this. Not sure if that makes me an okay person or not. Just saying it’s possible your child might marry someone who is responsible but had hundreds of thousands in student loan debt. How would you feel if these gifts went to pay that off? What if they divorced not long after the debt was paid off? Just posing bad case scenarios. This is why when I get to my point in life where you are I hope I can be of the mindset that this money giving can help people but I need to emotionally let it go and be okay with whatever follows. Especially if it’s money you truly don’t need, then you need to be okay with that bad case scenario I presented

Thanks for the open and honest background. I think for this money, a few hundred k, we are ok with taking the risk. But I acknowledge the risks (spouse in debt, spouse or significant other taking advantage, one or both of the kids spending through it or making bad investments) are real. I suspect that we will be less sanguine with the inheritance they get from us, especially if we set up the trusts while still living.

it occurs to me that I have not shared one other detail that has given me some confidence they will make good decisions. For several years now I have been gifting them enough to make a backdoor Roth contribution. We talk about that process and their investments every year or so because my deal with them is that I only give them this money for the Roth, not for spending.

[Larry Ragman]

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.

The life expenses are valid considerations, though not all apply in their particular situation (no student loans, no short term need for cars, weddings are on us more or less). The house down payment though, I really would be ok if they used some or all for that. Since you and Tim both suggest holding the money back I’ll have to think about it a bit. The way I interpret your input though, I would probably say this is a question of timing and perspective. I’ve been working with both of them on finances for a few years. But I genuinely see this as life changing money in terms of financial independence if they invest it, so I am still inclined to focus them on that.

[Larry Ragman]

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

The key issue with the trusts is that they are a way to exercise control, and in many ways I would like to do that, but it would run counter to our intent, which is to gift them a measure of financial independence.

[pit.alumni]

The key issue with the trusts is that they are a way to exercise control, and in many ways I would like to do that, but it would run counter to our intent, which is to gift them a measure of financial independence.

Trusts can have advantages outside of control and in some cases the beneficiary can also exert significant control. They can protect assets and in the case of a divorce can keep the money in the family. Not saying that this is appropriate in your case but a conversation with an estate attorney might be helpful.

[FIREshrink]

Trusts are very much about protection moreso than control. Sometimes you are protecting from the beneficiary, which smacks of control; but sometimes you are protecting from external forces, and then even the beneficiary may come to appreciate the protection.

[Tim]

“Since you and Tim both suggest holding the money back I’ll have to think about it a bit.”

As with anything, presentation counts.
There is a difference between a gift of $300k cash for whatever and a gift for a purpose. I really don’t view that as “strings” or controlling. I would prefer an honest open communication.
This is money for an investment account is pretty clear. My investment in my kids is for their own good, they need to make good decisions. I refuse to make the choice. I will always discuss options.
I will never use the purse strings to control them.
WBD and I have a significant difference.
I would have popped for a $5k continuing credit card balance to keep it from blowing up to a $50k balance. My deal was you owe me $5k. Don’t screw up again. Happened again. Now you owe me $10k. That call from the kid is not easy. I really never asked what they spent it on. When you have a problem, tell me sooner than later.
WBD chooses to have a child pay the price. But WBD had a different situation.
From your situation, I would hope your kids would give you a call if they were buying a house. If you wanted to use it as a match for retirement savings. Whatever, the goal is for them not chip away on simply spending.
I do my daughter’s taxes and give her directions and have access to her 3 institution retirement accounts and Roth and taxable. This year I made her sit with me and go over every form.
It’s her life and her money. What she wants is to avoid big mistakes, not value judgements. Guiding without directing.
I think gifting your kids and investment account can be handled by the kids. I do think they would be receptive to making you authorized on the account. Make them set it up, including their bank account investments and beneficiary. Part of the learning process.
You know your kids better.


Full disclosure: A spouse greatly changes the family dynamics.
I have another kid, that shares nothing. Nada, zip, zero. It’s okay.

[Larry Ragman]

Trusts are very much about protection moreso than control. Sometimes you are protecting from the beneficiary, which smacks of control; but sometimes you are protecting from external forces, and then even the beneficiary may come to appreciate the protection.

There have been several suggestions long this line, so I’ll take the advice and check into it some more. But only irrevocable trusts offer asset protection, right?

[pit.alumni]

There have been several suggestions long this line, so I’ll take the advice and check into it some more. But only irrevocable trusts offer asset protection, right?

I had an irrevocable trust at one point. It was irrevocable by me but I had the power to choose the trustees. Assets could be removed by the trustees I chose. I am the trustee of a trust for one of my children. It protects the assets from their spouse who they are divorcing but as trustee I can still remove assets for their benefit. My understanding is irrevocable doesn’t mean permanent, just irrevocable by the beneficiary.

[Larry Ragman]

I had an irrevocable trust at one point. It was irrevocable by me but I had the power to choose the trustees. Assets could be removed by the trustees I chose. I am the trustee of a trust for one of my children. It protects the assets from their spouse who they are divorcing but as trustee I can still remove assets for their benefit. My understanding is irrevocable doesn’t mean permanent, just irrevocable by the beneficiary.

I think I understand, thanks. But my question was aimed at the purpose. If I were seeking to protect the kids as beneficiaries I would need to use an irrevocable vice revocable trust. Right?

[afan]

From an estate tax POV, the best might be for your wife to disclaim, if the money would then go to the kids. Since there is no will, I would have an expert estates and trusts attorney go over the situation carefully.

If disclaiming would not send the money to the kids, or it is too late to disclaim, then giving it to them in trust would be the next best. Remember that the estate tax exclusion amount is slated to drop dramatically in a few years. Many people who are below current thresholds will be above them soon. The sooner your wife makes the gifts, the sooner the money is out of her estate. It can the grow without incurring higher estate taxes in the future. You would want to make theses gifts in trust, not outright, to provide the protections others have brought up.

From an income tax point of view, distributing investment returns to the trust beneficiaries will likely result in lower taxes. This of course depends on the kids' income tax rates. For a portfolio of VTI and a muni fund- VWIUX or VTEB-.at the level of assets you describe, the tax burden will be low in any case.

[afan]

I think I understand, thanks. But my question was aimed at the purpose. If I were seeking to protect the kids as beneficiaries I would need to use an irrevocable vice revocable trust. Right?

Yes. If your kids could revoke the trust, then they would get no protection. The beneficiary of a trust they can revoke is treated as the owner of the assets.

[Tim]

The irrevocable trust has an option that the beneficiary can change the trustee. My neighbor the estate attorney confirmed in a brief chat yesterday that this approach is how he is handling ONE beneficiary. Another does not have that option. State law dependent. You can make a trust dance if you want. Flexibility has consequences.

[Larry Ragman]

From an estate tax POV, the best might be for your wife to disclaim, if the money would then go to the kids. Since there is no will, I would have an expert estates and trusts attorney go over the situation carefully.

If disclaiming would not send the money to the kids, or it is too late to disclaim, then giving it to them in trust would be the next best. Remember that the estate tax exclusion amount is slated to drop dramatically in a few years. Many people who are below current thresholds will be above them soon. The sooner your wife makes the gifts, the sooner the money is out of her estate. It can the grow without incurring higher estate taxes in the future. You would want to make theses gifts in trust, not outright, to provide the protections others have brought up.

From an income tax point of view, distributing investment returns to the trust beneficiaries will likely result in lower taxes. This of course depends on the kids' income tax rates. For a portfolio of VTI and a muni fund- VWIUX or VTEB-.at the level of assets you describe, the tax burden will be low in any case.

We asked, but our lawyer said that disclaiming really didn't work in this case because of the intestate rules. Well, more properly she said it might be possible but it would take longer, cost us more money, and the judge still might not agree. We decided it was easier for my wife to inherit and gift the money.