Are you better off giving money to children now when you can see the results or doing it through your estate after shuffling off this mortal coil?
That is the dilemma that millions of parents and grandparents confront as they pass some $73 trillion through 2045 to the next generation, according to 2022 data from research firm Cerulli Associates. Both approaches have their pluses and minuses.
Giving too much too early can put parents in a financial bind in their later years. But if you can afford a gift now and your children need the money now for a good purpose, making them wait is harder to justify.
How much to give is as critical as when to give it. Significant gifts can disincentivize work and may affect family relations. Wealth managers and financial advisors see how parents and grandparents struggle with these questions, and they advise older generations to consider the values they want to instill and the purpose of the gift.
KIck-starting a career with a gift
Chris Kampitsis, financial planner at Barnum Financial Group, says gifts strike a delicate balance between enhancing a child’s lifestyle and overdoing support.
He worked with a couple whose son was pursuing a dream to work at a professional sports organization. To supplement a low-paying early-career job, his parents paid his rent for a few years. The son received promotions and is now doing well financially, and recently the organization’s team won a championship. Kampitsis says this strategic gifting at a key life moment set up their child for future success.
“That child may not have had that opportunity if the family wasn’t in a financial situation to support him,” Kampitsis says. “I think that’s a very different type of gifting than just saying, ‘My child doesn’t have a job, doesn’t have any aspirations, and I’m paying for them to live in this amazing apartment.’”
Anyone can make a yearly gift to a person of up to $17,000 tax-free, or $34,000 per couple, but parents and grandparents can financially help children in other ways that don’t trigger gift taxes. They can make direct tuition payments to schools or universities, which is tax-free. Unlike a 529 school savings plan, there is no limit to how much can be given. Parents and grandparents can also help with down payments on a child’s home without paying gift taxes.
Gifts don’t have to be large amounts. Colleen Carcone, director of wealth planning strategies for TIAA Wealth Management, says one of her favorite strategies is for parents or grandparents to make gifts to help children or grandchildren begin saving for retirement. A gift of a few thousand dollars now, after four or five decades or growth, will be worth a lot of money. If the recipient has earned income, the donor can contribute to an individual retirement account or a Roth IRA.
“That’s something that can reinforce the donors’ values of saving money. It also helps the recipient to start chipping away at a goal,” she says.
Older generations who have limited assets should think twice about making monetary gifts while they are alive. Krysta Dos Santos, head of financial planning at GenTrust, recommends giving material goods such as jewelry or other keepsakes to younger generations instead.
“There’s some joy in it. You get to watch people enjoy the gifts you’ve given them,” she says. “And there’s no bickering or question marks around who that jewelry was intended for.”
Keeping in mind the purpose of savings
Scrimping to have a sizable estate can turn older generations into misers.
“We see a lot of millionaires next door who almost become addicted to the bank balance,” Kampitsis says. “They have millions and millions in investment accounts that aren’t benefiting anyone.”
Whether parents give gifts to their children while they are alive or in their estate plan, Dos Santos says families should talk about their values and intentions around money. She gave an extreme example of a client, a single mother working two jobs, raising six children and paying for their college. She was dumbfounded when her parents left her $35 million in their estate plan after not having given her any previous financial support.
Dos Santos says the client wondered what other secrets her parents had and she questioned their entire relationship and what they valued.
“Ultimately, she did not get the resolve one would hope for. She tells herself that she knows her parents valued hard work and grit and is now just left to assume they were trying to teach some type of lesson about making it on your own,” she says.
Mitigating spendthrifts in estate plans
High-net worth families may worry that large financial gifts can disincentivize work. Financial advisors say these are urgent questions for ultra-high-net-worth families as generous federal estate tax rules are set to expire in 2026. Currently individuals can give up to about $13 million ($26 million for couples) tax-free in their estate plan; this amount would be halved if Congress lets these exemptions expire.
The advisors say families in this situation can use spendthrift trusts to dictate the terms of when and how the trustee can access the money, mitigating some of those concerns.
Derek Pszenny, co-founder of Carolina Wealth Management, says he has used annuities to prevent an heir overspending. One client’s estate plan instructed the executor to buy an immediate $1 million annuity for their son, which will roughly pay him $55,000 annually for the rest of his life.
He worked with another high-net-worth couple who were deciding how to divide assets in their estate plan between their two children. Their son was an engineer, while the daughter didn’t have similar work ambitions.
“She told them, ‘Why would I work very hard? I can just wait for you guys to pass away and I’ll get my inheritance.’ The mother and father did not take kindly to that,” Pszenny says, adding that the parents left the daughter $50,000 and about $2 million to their son. “The daughter effectively got written out because the parents didn’t like that mind-set.”
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