When Should I Start Transferring Wealth to my Children? Key Points to Consider
Updated: May 16
When you die, your assets are distributed in one of three ways: to the government as taxes, to a charity, or to loved ones. Proactive planning can help ensure that your assets end up where you intend them to go. If you want to transfer wealth to the next generation, you can employ strategies to make sure the transfer is tax efficient. Today we are going to answer, "When to transfer money to my kids?".
Members of the GenX and Millennial generations stand to inherit several trillion dollars from their Baby Boomer parents. The logical question is, are they ready to manage this money wisely? The answer depends upon the individual.
A second consideration is whether giving them money will spoil them by making their own wealth accumulation easier. These generations are highly educated. On the other hand, they face significant economic challenges that Boomers did not face and may need money to buy a home or to pay for college without accumulating debt.
Beginning to transfer some money early allows parents to see how the young adult handles the money. It also may bring parents joy at seeing the benefits their children receive from the money.
Whatever you decide, communication is important. If you don't intend to transfer wealth to your heirs at death or plan to use a strict trust, communicating this to your heirs now will allow them to develop an alternative plan. If you do intend to do so, you can begin instilling good stewardship habits.
Four Questions to Ask
One way to think about transferring wealth is by thinking about the benefits your children will receive from the money. Dividing your estate equally may not necessarily make each child equally happy. It also may not necessarily give equal benefits.
Ask yourself these four questions when determining how much to transfer to each child and when:
Who? Think about funding specific projects and who can benefit the most from them.
How? Discuss your child's dreams and transfer money to fund specific initiatives. The point isn't to control your children, but rather to find out what is important to them and then decide what to fund. For example, one child may want to be a doctor, so funding for additional education will be critical. Another child may want to start their own business, so capital will be important. Of course, you're not obligated to fund all their dreams. The point is that you can establish trusts or accounts designed for a specific purpose.
When? Once you know your children's dreams, you can fund them at the most optimal time. If you wait until your death, chances are the opportunity the child dreamed about no longer is relevant.
What's left? After you've funded specific projects, your estate will likely be considerably smaller. At this point, you might then consider splitting the remainder equally.
How to Do it In a Tax-Efficient Way
Once you've determined what you will fund, you'll do so in a way that minimizes tax liabilities. Here are five tax-efficient ways:
Direct payments. You may be able to pay tax for certain expenses directly to avoid a gift tax, for example, paying graduate school tuition directly to the university.
Annual gifting. You can give $15,000 if single or $30,000 per couple to each child annually without filing a gift tax return. Giving the maximum each year will allow you to spread the gift over time without tax consequences.
Loans. You can structure the transfer as a low-interest loan. The IRS has established rates and documentation requirements that you'll need to follow.
Irrevocable trusts. Establishing a trust removes the money and its appreciation from the estate while allowing access to a specified cash flow.
Roth IRA. Depending upon your income level, transferring assets to a Roth IRA from a traditional one may make sense. The money will grow interest-free for your children, and you will pay tax on it in the year you convert.
Transferring wealth to your children requires making some decisions. With forethought and planning, however, you can transfer the wealth safely and efficiently.
How much money can you gift a family member in 2022?
If someone wants to give money to his family members then it's great. If someone gives your kid something cheap that can be purchased in a garage, and they are given monetary rewards then they can get back their investment. The IRS is responsible for determining if you can gift money more than one time without paying any taxes.
The IRS has established statutory guidelines for the giving of funds under the gift tax system. In 2022, an exemption for gifting money is a maximum of $15K for each joint filing taxpayer. Keep in mind that all of this has tax implications.
IRS definition of Gifting Money
The federal government defines gifts as "all transfers of goods and services directly to individuals in exchange to the recipients of a given amount of money". This mouthful covers quite a few interesting gifts. Even though some people consider a monetary gift more similar to jewelry or household items, gifting money is listed as gifts in these definitions.
According to IRS definitions, gifts cannot be exchanged with anything else if they do not have similar value. This is important to keep in mind if you are gifting custodial accounts, a joint bank account.
Reporting Monetary Gifts
Spouses cannot combine gifts on joint income tax returns. All spouse reports are reported in a single form. If your gifts of money over a year are not filed, your gift tax only include the overages. Form 709 is due by March 15 for the calendar year following your last gift that oversold your exclusion period for a gift. The filing date will be extended until the following Monday, unless the filing period has passed.
Tax Implications for Larger Gifts
IRS provides simple rules regarding money gifts. The gift money will increase by one person each year from $15,000 to $16,000 in 2021. The gift will give your family a total of $30000 annually. The amount of your lifetime gift money exemption must be reported to the IRS. The 2021 IRS lifetime gifts exemption gives a person $11.7M ($120.6 million in 2021) to a friend or family member during their lifetime.