Better way to leave money to kids?

[tallguy]

I don't want to derail another thread, but the subject of leaving money to kids came up.  My first priority is obviously to take care of myself and my needs first, but I will still end up leaving a good amount, barring disaster.  If that is a given, the question becomes, "How best to do that?"  There is a good discussion to be had on the benefits of gifting while alive if you are able.  Not only do you see the benefit of your giving, but you are able to help when and where they need it.  It can be greatly satisfying to help them buy a house, go to college, or pay medical or childcare bills when they actually need the money.  Others may prefer to guarantee they have enough to care for themselves first, and the kids can have whatever is left.  Also a valid option.

My own circumstances have turned out a little differently than I originally planned, and I should be more secure than I thought.  I now feel I can gift some now, but I still don't want to just give money without a real purpose behind it.  My original plan was to take some from my IRA each year since I can do a certain amount tax-free.  If I had something to spend it on, I would take a withdrawal.  If I didn't, I would do a conversion to Roth.  My Roth balance is high enough for me now, so converting more won't really do much.  If it is inherited, my son will have to empty the account within ten years.  Good, but not ideal. 

I am a big believer in Roth IRAs and realized very early on that Roth space is precious.  It is also "use it or lose it."  If you don't contribute, that year is gone.  When he started working, I funded a Roth with everything he made during those few months.  The second year, I said I would match what he contributed, so naturally he put in enough to max it out.  I wanted to make sure I got him started on the right foot with how important saving and investing is to his future.  What I have started doing now is to max his Roth for him.  Instead of him contributing $1000 for 2021, I gave him the other $5000.  I told him if he does $2000 for 2022 I'll give him the other $4000.  Not only is it an incentive to save, but it is far better to have it in his Roth now than to have it in an inherited Roth later.  He then gets the benefit of having it in his own account and can maintain an additional 25-30 years of tax-free growth for his lifetime rather than having to empty the inherited account in ten.  

  

[jerseygirl]

We’re giving kids and grandkids while we’re here to see the benefits for them. Helping with tuitions ( trying to avoid student loans) , house down payments , summer camps, etc It is a pleasure to see kids grands graduate and going on to good jobs .
We need to be aware not to give too much . Both DD and DIL have mentioned that. So never give money without a specific aim. But we don’t check up on how they’re using it (no strings) but we know that they are using for tuitions etc
br]Taking family trips is something I really enjoy. We worked hard, lived frugally and so do kids and grands
We feel very fortunate to have enough for our retirement life but still watch costs. Guess it’s very much ingrained in our natures. Always look at specials in grocery stores, no designer clothing etc but never interested in designer things anyway
If there is money to be inherited that’s fine but we do enjoy being able to give to charity and family while we can see now rather than when we’re dead

[Deleted]

I'm also starting to feel a lot more secure about my ability to meet future costs, even the scary LTC scenario, and know I can't take it with me.  DS and DDIL have no student loans.  He and DDIL live modestly with their 3 kids and asked for money only once:  they were planning to buy a bigger house (good thing, DS' starter house was getting crowded and #3 was on the way when they moved) and $7,000-$10,000 would mean their monthly outgo wouldn't change- they were moving to a bigger house in a less-stellar school district but they're home-schooling.  I was impressed at how carefully he'd worked through the numbers and I gifted them $10K outright.  Last year I just had more $$ than I could spend and saw no need to leave it in the accounts so I gifted them $18K (spread between the two to stay under the gift tax documentation trigger).  They're about to arrive here tonight and I plan to let them know that when Dad's estate settles (only the checking account had to go through probate) I want to give them another $15,000.

I put no conditions on anything once it leaves my hands.  They have a tendency to help out others so some may go towards that.  DS also wants to pay off their mortgage.  That's a personal choice- I still have a balance of $60K on mine and I'm keeping it but we're all different.

Finally, a LOT goes into the kids' 529 accounts.  I did some research and found that the only plan that gives me a state deduction has American Funds, which carry a front-end load.  I now put $8K (max that I can deduct) in the state plan and the rest in a Fidelity plan that offers much lower-cost ETFs.  The total is now at $125K but the oldest is about to turn 8 so I have time.  This is my second financial priority (the first is not outliving my savings).

There's also the fun of indulging them along the way:  the two older ones enjoy spending a night or two in a local hotel when I visit, I take them to a fun haircut place, and I hope to resume overnight trips to Chicago with the 2 older ones soon.  That involves a plane flight and the 5-year old hasn't been there yet.  

It's an interesting balance.  I'm proud of how DS and DDIL are managing on their own resources and don't want to take away from their independence.  I think I'm doing OK so far.

[buystoys]

We have no kids, so we had a serious dilemma when deciding what to do with our estate.  My nieces and nephews are doing OK for themselves.  Two nieces are still in high school and the others are all married or engaged.  My brother and SIL and sister and BIL all make better money than DH and I ever did. 

DH's family, on the other hand, has kids doing not so well.  He has four nieces and three nephews.  One nephew is doing well.  One nephew is in high school.  The rest of the kids?  Not so much.  One of DH's sisters is a teacher, so she never made a lot of money.  Her husband used to own his own deli, but supported his whole family from the proceeds.  They are doing OK, but not well off.  His other sister and brother are in good shape financially.

We didn't feel it was right to pick and choose who to help.  The kids who aren't doing so well probably would just blow the money anyway.  None of them are interested in investing for their futures, so anything would be non-helpful in that manner.  The kids who are doing well are all doing well.  They are all investing in their futures, whether it's going back to school to get good degrees or working on maxing out the available 401(k) plans.  We have the opposite ends of the spectrum we'd be dealing with.

After much discussion, we decided to help none of the kids and to donate our estate to charity.  If something comes up while we're alive and we feel the need to help, we will.  Their financial futures are in their own hands, though.  If there is going to be any inheritance, it will have to come from their parents.

[Happy prose]

tallguy Can you please explain to me why your son would have to empty account in 10 yrs if he inherited your Roth? I didn't realize there were rules on that.

[saveinla]

Is a taxable account preferable as an inheritance - as they dont have to withdraw within 10 years?

[teen persuasion]

Mar 22, 2022 19:10:54 GMT -5 Happy prose said:

tallguy Can you please explain to me why your son would have to empty account in 10 yrs if he inherited your Roth? I didn't realize there were rules on that.

The SECURE Act changed the rules on inherited IRAs. They have to be emptied in 10 years.
link

[tallguy]

Mar 22, 2022 19:10:54 GMT -5 Happy prose said:

tallguy Can you please explain to me why your son would have to empty account in 10 yrs if he inherited your Roth? I didn't realize there were rules on that.

Yes, the SECURE Act changed the rules in a few ways.  Any non-spouse who does not qualify under one of the special rules (minor child of decedent, disabled, not more than ten years younger than decedent) must empty the account by December 31 of the tenth year after the death of the original IRA holder.  For example, if I were to die tomorrow my son would inherit my accounts.  The death would have occurred in 2022, so the accounts would have to be fully emptied by December 31, 2032.  A surviving spouse beneficiary is not subject to that rule and has more options for how to handle inherited accounts.  Because an IRA was developed as a way for individuals to plan for their own future, the rule does make sense.  It was designed for one lifetime, not to provide tax-deferred or tax-free benefits for generations in perpetuity.

[tallguy]

Mar 22, 2022 20:32:36 GMT -5 saveinla said:

Is a taxable account preferable as an inheritance - as they dont have to withdraw within 10 years?

Yes, a taxable account is FAR better to leave as an inheritance.  Taxable accounts do not ever have to be emptied, plus they receive a stepped-up basis so avoid capital gains tax altogether if sold immediately.  Any growth from the date of death onward would be subject to tax, but nothing prior to that would. 

[teen persuasion]

Mar 22, 2022 20:51:16 GMT -5 tallguy said:

Mar 22, 2022 20:32:36 GMT -5 saveinla said:

Is a taxable account preferable as an inheritance - as they dont have to withdraw within 10 years?

Yes, a taxable account is FAR better to leave as an inheritance.  Taxable accounts do not ever have to be emptied, plus they receive a stepped-up basis so avoid capital gains tax altogether.  

Taxable may be preferable to a tIRA, but I'd still prefer a Roth IRA over taxable. 

Withdrawals from the Roth also avoid tax, and can be dragged out at least 10 more years, while the step-up in basis on taxable occurs at the death of the original owner - capital gains could develop again afterwards.  And any withdrawals from the Roth account can eventually be put into a taxable account.

Basically, you get an extra 10 years of at least partial tax free growth with the Roth IRA, vs taxable.  It's not yet clear if there will be RMDs for inherited Roth IRAs - apparently they are debating it.

[tallguy]

Mar 22, 2022 21:01:13 GMT -5 teen persuasion said:

Mar 22, 2022 20:51:16 GMT -5 tallguy said:

Yes, a taxable account is FAR better to leave as an inheritance.  Taxable accounts do not ever have to be emptied, plus they receive a stepped-up basis so avoid capital gains tax altogether.  

Taxable may be preferable to a tIRA, but I'd still prefer a Roth IRA over taxable. 

Withdrawals from the Roth also avoid tax, and can be dragged out at least 10 more years, while the step-up in basis on taxable occurs at the death of the original owner - capital gains could develop again afterwards.  And any withdrawals from the Roth account can eventually be put into a taxable account.

Basically, you get an extra 10 years of at least partial tax free growth with the Roth IRA, vs taxable.  It's not yet clear if there will be RMDs for inherited Roth IRAs - apparently they are debating it.

Yes, of course.  Sorry if that wasn't clear.  My OP did specifically state the ten-year tax-free growth in an inherited Roth.

[Tiny]

My sibling had kids late in life AND more disposable income than he expected/anticipated in retirement. He's been gifting them $$ every year (in the early years it had strings attached - as it was to go into a Roth or 401K -as they were starting out in careers that start out with lower income for the first 5 years or so... ) I know he gifted $$ for weddings, first houses, and is gifting to the grandkid's 529's.

I think his thinking was it was better to get a total of X dollars to each of them/their family over a course of years (he didn't think he'd live to see 70... and here he is one year past.). Rather than to have that $$ be given to them in a big lump when he's dead. The yearly gifts aren't life changing but I'm sure they do help.

Odds are they all will still get some inheritance money, but who knows when that will happen and how much it will actually be - and I think we've all seen the discussions about the 'uncertainty' and difficulty planning one's life people experience when they think they are getting a big inheritance.

I think that's a good way to get money to your heirs if you find you have "too much" and aren't a ba-zillionaire and your heirs are working thru typical life milestones and could use some extra $$.


I now understand why some adults get gifts of $$ every year from their parents.

[Deleted]

Mar 22, 2022 20:49:13 GMT -5 tallguy said:

Mar 22, 2022 19:10:54 GMT -5 Happy prose said:

tallguy Can you please explain to me why your son would have to empty account in 10 yrs if he inherited your Roth? I didn't realize there were rules on that.

Yes, the SECURE Act changed the rules in a few ways.  Any non-spouse who does not qualify under one of the special rules (minor child of decedent, disabled, not more than ten years younger than decedent) must empty the account by December 31 of the tenth year after the death of the original IRA holder.  For example, if I were to die tomorrow my son would inherit my accounts.  The death would have occurred in 2022, so the accounts would have to be fully emptied by December 31, 2032.  A surviving spouse beneficiary is not subject to that rule and has more options for how to handle inherited accounts.  Because an IRA was developed as a way for individuals to plan for their own future, the rule does make sense.  It was designed for one lifetime, not to provide tax-deferred or tax-free benefits for generations in perpetuity.

I'm dealing with that with Dad's IRA but my share was "only" $80,000.  401(ks) started very late in Dad's working years.  I did hear on a tax-related podcast that you have to make RMDs based on your age over those 10 years but I already took out $8,000 last year and $7,000 this year and am planning to do it gradually.  The $$ goes straight into my donor-advised fund so it's tax-deductible but it still hits my AGI.

I haven't touched my IRAs yet- the conventional wisdom is to withdraw from after-tax accounts first.  I don't even want to think about the tax bills DS and DDIL would have if I were to leave those behind.

[tallguy]

Mar 23, 2022 7:44:39 GMT -5 @athena53 said:

Mar 22, 2022 20:49:13 GMT -5 tallguy said:

Yes, the SECURE Act changed the rules in a few ways.  Any non-spouse who does not qualify under one of the special rules (minor child of decedent, disabled, not more than ten years younger than decedent) must empty the account by December 31 of the tenth year after the death of the original IRA holder.  For example, if I were to die tomorrow my son would inherit my accounts.  The death would have occurred in 2022, so the accounts would have to be fully emptied by December 31, 2032.  A surviving spouse beneficiary is not subject to that rule and has more options for how to handle inherited accounts.  Because an IRA was developed as a way for individuals to plan for their own future, the rule does make sense.  It was designed for one lifetime, not to provide tax-deferred or tax-free benefits for generations in perpetuity.

I'm dealing with that with Dad's IRA but my share was "only" $80,000.  401(ks) started very late in Dad's working years.  I did hear on a tax-related podcast that you have to make RMDs based on your age over those 10 years but I already took out $8,000 last year and $7,000 this year and am planning to do it gradually.  The $$ goes straight into my donor-advised fund so it's tax-deductible but it still hits my AGI.

I haven't touched my IRAs yet- the conventional wisdom is to withdraw from after-tax accounts first.  I don't even want to think about the tax bills DS and DDIL would have if I were to leave those behind.

Not sure from the wording which you are referring to here but yes, I wanted to get my t-IRAs down to manageable levels so that RMDs would not become an issue for me and the distributions from anything left over would not create a bigger tax hit for my son.  I'm fine with leaving the after-tax accounts because of the stepped-up basis.  If that is what you meant I agree.  I do not agree that "the conventional wisdom" is correct for everybody.  Everyone needs to examine their own needs and situation to determine what is best for them.  I have no intention of taking from my taxable accounts because that is what works for me.

[giramomma]

My inlaws have been giving us our inheritance for retirement purposes since we were first married.

Where it goes just depends. As long as we don't spend it on hookers and blow, they really don't care.

They also give us 529 money for the kids. I've been putting DS's in a Roth instead. Kid doesn't need more in his 529. He'll have at least 50K left over if he decides to go to a 4 year at some point...Or, if he procreates at a young age, that money will have at least 25 years to grow before his kids would need it for college.

I also think the philosophy only works under a particular set of circumstances...which is how families were created when we were growing up. You got married and had your kid closer together by 35. Kids were out of the house, and you are empty nesters from your early 50s.

We have a 14 year age span between our kids, and my last one came at 42. (The age of first time mothers, is increasing btw, as well as the number of women having kids in their 40s). My oldest will be job ready/able to support himself in about 18  months. I still will have a 16, 12, and 6 year old at home at that point. Minor kid needs come before adult kid wants.

I also have a genetic mutation for cancer. And I have had cancer once. My risks of occurrence, even with the mutation are small. But, still risks. My mutation is thankfully only associated with one other cancer, colon cancer. So far, so good there. But, again, you never know. (Well, it's also associated with prostate cancer...but I don't have to worry about that.).

So, even if things are looking great 7 years from now, I'm probably still not going to start giving my adult kids money. I'll still have a 13 year old at home that will need support. And there will always be the health worries. Not enough to let it consume, me. But,  I can't ignore it, either.

At 46, I'm way still in the thick of having a life consumed by work and child rearing, while trying to start to narrow down retirement options. (I'm 10 years out from retiring with a full pension).   Frankly, that's enough right now, without thinking about if/how my kids are going to inherit on top of it.

[Lizard Queen]

I had kids late enough in life that my question is, do I retire slightly early, or continue working until FRA to continue supporting them through college/insurance to 26. I suppose that would also determine how much extra we have to gift them in addition.

[teen persuasion]

Mar 23, 2022 7:44:39 GMT -5 @athena53 said:

Mar 22, 2022 20:49:13 GMT -5 tallguy said:

Yes, the SECURE Act changed the rules in a few ways.  Any non-spouse who does not qualify under one of the special rules (minor child of decedent, disabled, not more than ten years younger than decedent) must empty the account by December 31 of the tenth year after the death of the original IRA holder.  For example, if I were to die tomorrow my son would inherit my accounts.  The death would have occurred in 2022, so the accounts would have to be fully emptied by December 31, 2032.  A surviving spouse beneficiary is not subject to that rule and has more options for how to handle inherited accounts.  Because an IRA was developed as a way for individuals to plan for their own future, the rule does make sense.  It was designed for one lifetime, not to provide tax-deferred or tax-free benefits for generations in perpetuity.

I'm dealing with that with Dad's IRA but my share was "only" $80,000.  401(ks) started very late in Dad's working years.  I did hear on a tax-related podcast that you have to make RMDs based on your age over those 10 years but I already took out $8,000 last year and $7,000 this year and am planning to do it gradually.  The $$ goes straight into my donor-advised fund so it's tax-deductible but it still hits my AGI.

I haven't touched my IRAs yet- the conventional wisdom is to withdraw from after-tax accounts first.  I don't even want to think about the tax bills DS and DDIL would have if I were to leave those behind.

So where is this "conventional wisdom" coming from?

I've seen new posters on Bogleheads mention it, too, and more experienced posters immediately disabuse them of it.  Kitces has multiple blog posts about the better plan is to tap all options (pre-tax, taxable, and Roth) in varying percentages yearly to best even out your tax burden over time.  If you tap only taxable first, your tIRA balances grow larger, so RMDs are larger later.  If you tap only Roth first, you are paying no tax now, but wasting the zero bracket (standard deduction space).  If you tap only tIRA first, you are probably paying too much tax, as it's all ordinary income, and you might push yourself out of ACA subsidies, or into IRMAA unnecessarily.

A measured blend of all 3 keeps tIRA growth in check, taps some taxable (hopefully in the zero LTCG bracket, and return of basis doesn't add to AGI but is spendable), and some Roth if needed to fulfil spending needs w/o increasing AGI to get ACA subsidies.

[minnesotapaintlady]

Mar 23, 2022 10:05:15 GMT -5 Lizard Queen said:

I had kids late enough in life that my question is, do I retire slightly early, or continue working until FRA to continue supporting them through college/insurance to 26. I suppose that would also determine how much extra we have to gift them in addition.

Same.  But I don't worry about it a whole lot.  My life has never gone how I thought, so planning is just a way to pass my time it seems.  At 23 I was living with my boyfriend in my first house with absolutely NO desire to ever have kids, I was saving to build my dream place so I could raise and show Paint Horses.  At 33 I was married to the person I thought I'd be with my entire life expecting my first child, he had a very good job and I was within a few months of starting to be a SAHM with no plans of working anymore (at least not until the 3 kids were launched).  At 43 I had just gotten out of a very bad second marriage, and here I am at 53 with plans to retire at 59 when my youngest graduates and getting an RV to travel the country. 

Let's see where things are at 63.

[dondub]

Our financial planner suggested last year that we need to consider gifting to the Dubettes to begin lowering the taxable value of our estate. So we started that process and will do that every year now. We can do $15,000 each to each of them. So a max of $30k each unless the max has gone up.

If we live long enough and get to that max it will significantly lower our inheritance tax burden. One benefit will be the assistance this offers for home buying. The west coast housing market is insane.

[Rukh O'Rorke]

Mar 23, 2022 10:27:05 GMT -5 teen persuasion said:

Mar 23, 2022 7:44:39 GMT -5 @athena53 said:

I'm dealing with that with Dad's IRA but my share was "only" $80,000.  401(ks) started very late in Dad's working years.  I did hear on a tax-related podcast that you have to make RMDs based on your age over those 10 years but I already took out $8,000 last year and $7,000 this year and am planning to do it gradually.  The $$ goes straight into my donor-advised fund so it's tax-deductible but it still hits my AGI.

I haven't touched my IRAs yet- the conventional wisdom is to withdraw from after-tax accounts first.  I don't even want to think about the tax bills DS and DDIL would have if I were to leave those behind.

I've seen new posters on Bogleheads mention it, too, and more experienced posters immediately disabuse them of it. 

so Austenianly phrased

[djAdvocate]

interesting thread.  i bookmarked it.  i have not given any thought to this, because most of my money is tied up in businesses, which don't have the benefit of being liquid assets that you can "stragegize around".  when i say most, i mean like 75%.  the remainder is MOSTLY in an inheritance from my mom.

not sure what i can leave boyo, other than the businesses.  which, of course, i am happy to do.

[bookkeeper]

We are purchasing another house with the end goal of leaving it to our son.  DS1 and his wife had twins last fall.  Their house is very small and affordable.  We live a seven hour drive away.  DH and I are wanting to buy a 3 bedroom 2 bathroom single level home in their area with the idea that DS1 and family can move into it when they are ready.  One of our grandkids will have some mobility concerns, so single level living will be very important. We could, in turn, use the small house for our visits and possibly short term rental.  We have no other mortgage debt right now and for around $15,000/year, this would make a big impact on their lives.

If this works right, DS and DDIL can continue to make the payment on their small house and DH and I will make the payment on the bigger house.  We can gift equity in the house to our son and DDIL or we can let them inherit it with the stepped up basis.  Or it could turn into a family drama and we could turn around and sell it.

We helped them buy the small house they are in now.  It will have doubled in value in 10 years.  We are looking to spend $200,000 to $275,000 for a larger home for the grandkids.  Property is pretty affordable.

We have another son.  DS2 lives across the country and is working on a 2nd degree.  He needs help with tuition, not a home purchase at this point.  We plan to gift him cash these next few years to pay tuition.  When/if he is ready for home ownership, we'll be here to help with his next address.

DH and I had zero help buying any of our homes.  His family could not afford to help and my family thought we should all be self sufficient.  We managed on our own, but I would like to advance property ownership for our children as an inheritance they can use right now.

[jerseygirl]

Yes $15000 is the gift limit this year. But you can give more than that but it decreases the limit that inheritance isn’t taxed. Think it’s something like $12 million now
We gave older son more than that to help with down payment. Just need to use IRS form 709 and then no gift taxes are due. eg if gifting $100000 then it’s $85000 over so make a separate check and fill in $85000 on form 709. Both you and spouse can gift $15000 to a person so $30000 to each person in a couple ($60000)without need to do form 709

[Happy prose]

So these rules pertain to my 457 account. I plan to retire 1/1/23, and I will be 63. I'm confused on what I'm reading. If I die before I'm 70 1/2, does my daughter only have 5 years to empty it?