You Can’t Take It With You: Creative Ways to Gift to the Next Generation

While you’re building wealth, making money may seem like one of the most important things in the world. After all, “money makes the world go round”; it’s how you feed yourself, how you clothe yourself, how you provide for your family, etc. At the end of the day, though, we all know “we can’t take it with us.” While we may (or may not) want to spend every last penny we’ve ever made, it’s still a good idea to come up with a plan to gift to the next generation, especially for those leaving behind significant wealth. Your priorities for your legacy will drive your plan. Once you determine what you want to emphasize with your legacy, there are many creative ways to gift to the next generation that will support those goals. From charitable gifting, funding college accounts or trust funds, or leaving behind real estate.

Charitable Gifting

Charitable gifting has received increased attention in the last few years especially with big name, ultra-wealthy people like Warren Buffet, Bill Gates, Melinda French Gates, Sara Blakely, Mark Zuckerberg, Mackenzie Scott, etc. signing the “Giving Pledge” and committing to giving the majority of their wealth to philanthropy ¹. Whether your goal is to donate all your wealth to your favorite cause or make a small behest, there are numerous ways for those gifts to be a win-win for both you and your favorite charity. While charitable gifting (especially for larger amounts) can be complex, charitable rollovers from a retirement account and gifting appreciated stock can be two additional ways to stretch your donations and give meaningfully.

• Charitable Rollovers: As many retirees know, starting at age 72, required minimum distributions (RMDs) must be taken from most retirement accounts, whether the retiree needs the money for living expenses or not. These funds (and any others withdrawn from most IRAs) are considered taxable income. However, a Charitable IRA Rollover allows individuals over the age of 70 ½ to make direct transfers of up to $100,000 a year ($200,000 for married couples) from their IRAs to qualified charities without having to pay federal income tax. These qualified charitable distributions can satisfy all or part of the RMD, helping to exclude some (or all) of your RMD from income and potentially avoiding the loss of exemptions, deductions, credits, and phase outs, etc. that can come with a higher tax bracket^2,3.
• Gift Appreciated Stock: Even if you’re not 70 ½, there are still tax benefits to be had for gifting to charities. Another “win-win” situation is gifting appreciated stock to a qualified charity. Publicly traded stock that has appreciated in value can often be directly transferred to a charity. If you sold that stock and wrote a check to the charity, you would be liable for capital gains tax on the appreciated shares. If, instead, you had transferred that stock directly, you get the benefit of gifting the day-of gift market value of those shares, plus the charity can sell the stock without having to pay any capital gains tax. Win-win!

College Accounts and Trust Funds? What about Special Needs?

Using a trust to gift to children, grandchildren or other heirs is a commonly used way to pass wealth from one generation to the next. Trusts can provide the beneficiaries flexibility in how they use the funds and provide the grantor with almost limitless abilities to set guardrails on how the funds can be used. However, they can require maintenance and updating (for instance if a grantor has new heirs to consider) and special construction to avoid/minimize estate or gift taxes. Since setting up a trust fund can have significant hurdles, other ways to transfer financial gifts include using a “transfer of death” designation for your financial accounts or, if your beneficiary is a minor, using an UTMA or UGMA account which allow assets to be managed by an adult until the minor reaches a certain age (usually 18 or 21), at which point the assets must be transferred into the minor’s name.

If education is your main priority, using the various tax-advantageous educational savings accounts to set aside money for your children’s, grandchildren’s, or even great-grandchildren’s education is another thoughtful way to distribute your financial gifts and emphasize your desire for your heirs to prioritize their education. Two popular plans are 529 Savings Plans and Coverdell Education Saving Accounts. Both are tax advantageous plans if the growth/withdrawals are used for qualified education savings. ⁴.

Like saving for college, there are numerous ways to save for a special needs beneficiary depending on your resources and individual situation. Two types of accounts that are designed to protect eligibility for public programs (like Supplemental Security Income and Medicaid) are ABLE accounts and Special Needs Trusts (SNT). Similar to the various educational savings accounts, there are benefits and downsides to both. ABLE accounts generally have minimal fees and maintenance requirements. SNTs, on the other hand, can be quite costly to create and maintain. However, SNTs can be invested as directed by the Trustee while an ABLE account is limited to the investment options available to the ABLE program. In general, funds from an SNT can be used more broadly than funds from an ABLE account, with the exception of paying for housing. When deciding which account type to establish, be sure to consult with an expert as it can get complex. However, once a plan is established, it can be a great way to transfer wealth to an in-need beneficiary.

What about the Family Home?

The family home or vacation property often has a huge sentimental attachment for the family that’s grown up and created once in a lifetime memories there. It can be a wonderful gift to your survivors, especially if it’s mortgage-free. However, be aware that it can also cause strife, especially if there’s numerous inheritors. Be sure to consider if all inheritors can afford and support an equal interest in the property. Otherwise, it may make more sense to leave a larger portion of real estate to family members that want and can afford the property and leave other inheritors other assets. Another option may be to explore setting up a family limited partnership or trust. Both will make it easier to transfer interest in the property and both can also hold assets that help financially support the maintenance of the gifted real estate. Ultimately, it’s worth planning ahead and having open and honest conversations with family members to avoid causing unnecessary problems.

Just because you can’t take your money with you doesn’t mean you can’t plan for it to be spent the way you’d like. Roughly 60% of Americans do not have a will or trust and without estate planning documents, upon your death you have no control over how your property is divided or spent ⁵. By doing some pre-planning, you can honor family members with charitable donations made in their names or help ensure that your financial gifts help set future generations up for success.

To continue the conversation and come up with a plan of your own, get in touch with our team.