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  • Mike Komara

When Should I Start Transferring Wealth to my Children? Key Points to Consider

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.

Should You?

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 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'll pay taxes 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.