TRANSCRIPT:
Welcome back to Financial Foundations, brought to you by Base Wealth Management, where we are the foundation to your financial plan. I’m your host, Dustin Taylor.
I’m your co-host, Alex Wolfe, certified financial planner, and I’m Kyle Howell, financial advisor at Base Wealth Management. Today, we’re going to discuss some crucial aspects of financial planning, especially when it comes to the financial well-being of your family across generations.
Okay, let’s dive right in, Alex. The primary goal of financial planning is to ensure that their money and people’s money can last for their entire lives. Practically speaking, what does that mean?
Yeah, so what that means is that, you know, you’ve saved up relatively speaking for many years, your whole life, and maybe you’ve set some goals and you need income to live off of to supplement your retirement for many, many years until you or your spouse pass away.
Yeah, so to add on to what Alex was saying, once that goal is achieved, you know, many people want to take care of their kids, want to take care of their grandkids, maybe pass on assets, whether that be during their lifetime or, you know, after they pass.
So that sounds like a comprehensive approach. I’ve seen a question come in asking if someone was about to pass or probably within the last year of their life and they want to start giving some of their money away to their kids and grandkids to enjoy it, is that something that they should do or should they wait until after they pass?
There’s definitely some strategies there to think about. One, if they’re nearing the end of their life, there may be reasons to wait to give some of that money to their children or grandchildren, but there are things that they can give now while alive that won’t have a big impact on either of their tax situations.
Yeah, and Alex and I were talking about a specific client this morning that had some very large gains in her account, and, you know, she’s not necessarily on her deathbed by any means. It is close to the end of her life, and it didn’t make sense for her to start transferring certain stocks from her portfolio to her kids and grandkids because of those gains being transferred to the kids. So when she does pass away at some point in the future, the kids will inherit those specific stocks at a step up in cost basis, therefore negating any of the tax ramifications of her giving those stocks while she was still alive.
So let’s start from the beginning. What would be the first step?
The first step would be to assess their financial situation and what they have to gift. Is it property? Is it assets in a taxable account, like Kyle was talking about, where there could be some highly appreciated assets that would make sense to gift after death and get the step up? Or is there money in an IRA where these individuals have to take a required distribution and they can just satisfy that and give money to the children or grandchildren or even a charity if that’s something that they’re inclined to do? So there’s things to think about and what type of assets they have and how much they want to gift. If they gift a significant portion, they may not owe any taxes, but they may have to file a gift tax return if it’s over the $18,000 annual exclusion. So they should first determine what the goal is of the gifting and then how much they can gift.
Right. So once that goal is established, what’s the next step?
So the next step would be, again, kind of determining, you know, do they want to gift during their lifetime or wait to leave a legacy behind when they’re gone? That would be where I would want to start the planning process and how we are going to gift these assets.
So why is it important to decide when to gift? What sort of implications are there?
I guess that depends on what type of account, assuming we’re talking about assets in IRAs, in trust-type accounts. Where are those assets located? What type of tax ramifications are we going to have on a trust account versus an IRA?
So, what sort of tax implications would there be?
So, as I mentioned before, you can gift up to $18,000 per year to anyone. If you go over that, then you have to file a gift tax return, even if no gift tax is owed. And you have a lifetime exclusion amount, which is set to be cut in half here shortly if the tax cuts and job acts are not extended or that estate tax exemption is not put back in place. But that’s only for the ultra-wealthy where that’s coming into place. Most people don’t necessarily have $13 million to gift or $26 million combined if you’re a couple. However, there are things, as we mentioned, about the step-up in cost basis for certain types of assets that make more sense to gift after death versus during their lifetime.
So you can definitely start gifting while alive and see your children or grandchildren enjoy that money, or use it on a vacation. It depends on your health and if you’re able to go with them or whatever you want to do. As far as your goal of gifting it, you can also start super-funding college, where you can put five years’ worth of contributions into a 529 account if you have enough cash to super contribute to those types of accounts. If you’re wanting to set your children or grandchildren up with education, those are some things that you can also look to do. And add to the limits, you know, Alex mentioned $18,000 per year, and that’s per person. So if you’re a married couple, it’s $36,000. And if you have two kids, it’s $18,000 to your son and $18,000 to your daughter. And if your kids are married, then it’s potentially $36,000 per child and their spouse. So there’s quite a bit of money that can be gifted away while you’re still alive.
Without any tax.
Without any tax implications.
So, is there a benefit to investing the money before gifting it?
Not necessarily, but you can. If you’re looking to gift individual stocks, like I know some grandparents have gifted their grandkids Disney stock shares or something that maybe there’s a mutual connection. Maybe it was their old company stock shares or something like that. In which, again, you might want to be mindful of the cost basis if you’re gifting stock from a brokerage or taxable account. But again, if you’re taking it out of an IRA, it can either be cash or it can be stock and have really no discernible difference in the tax implications to either of the parties. So no, I don’t think it really necessarily makes a difference. However, it might be a good educational time where the grandparent or parent can talk to whoever they’re gifting it to about investing and have a conversation about why it’s important to save and invest in quality companies or something like that.
Kyle, what about the right time horizon for investing at their age?
Let’s think about as you’re getting older and let’s say you’re in your late 80s or early 90s and you should probably be pretty conservative with your investments. But you’ve come to a point where you’ve realized that you’re not going to outlive your money. You’re going to have plenty of money left over when you’re gone. So maybe now you can take on more risk to leave more behind to your kids. For instance, I have a specific client in mind that is in her mid-90s, and she is in an all-stock portfolio. She’s got years and years and years of capital gains on these stocks, and we don’t want to sell them because we’re going to leave those specific stocks to her four kids. So that time horizon is changing just based on the situation.
That makes sense. So going back to the situation that was brought up at the beginning and kind of to summarize, what should you do if you had parents who are at the last stage of their life and they want to give money to their kids or their grandkids? What would be your recommendation?
In this situation, I highly encourage them to think about the assets that they have and what they want to start gifting from a tax standpoint and also how they want the money to be used. Also, make sure their beneficiary designations are all proper and the accounts are titled correctly. So that way, at the end of their life, when the family is mourning and memorializing them, they’re in a good place and don’t have to worry about estate headaches. And also, continue to gift up to the annual exclusion if they can do so.
Okay. So as Alex and Kyle have said, planning for the future involves setting your goals, considering tax implications, and making strategic decisions on when and how to gift. If you’d like more information about various topics, you can visit our website at basewealthmanagement.com. Subscribe to this podcast. Subscribe to our YouTube channel. You can also submit your questions, like our listener today. You can send those in to us at question@basewealthmanagement.com.
I’m your host, Dustin Taylor.
I’m your co-host, Alex Wolfe.
And Kyle Howell, financial advisor.
And happy listening.
