As record numbers of young adults reach retirement age, I continue to come across articles and studies about living legacies. When structured correctly, a living estate (also known as an “accelerated estate”) can allow parents to give some of their assets to their children while they are still alive, rather than waiting until they die. leave.

Think of a living bequest as an interest-free (and usually tax-free) advance on their inheritance to help grown children with big expenses like a down payment on their first home, seed capital for a new business, or financing their education. higher or student debt relief. For parents/lovers, a living legacy is a “financial helping hand” and a great way to test how well grown children will handle their inheritance when the time comes.

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I just got off the phone with a couple worth about $200 million. Their children are still young (11 and 17 years old). I started the conversation by asking them how prepared they thought their children were to inherit significant wealth one day. “This is one of our biggest concerns,” the man said. “We don't want money to destroy them. We want them to have money, of course, but we want them to be good citizens.”

When I have these conversations, one of the first things rich people tell me is that their kids don't think the family is rich. Trust me, the kids know they are rich. They may not know their family's net worth, but they know they have more money than most other families. They know they live in an amazingly beautiful home, attend private schools, and fly first class or on a private jet when traveling to the Four Seasons or on an African safari.

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Tools like a living legacy are best used with some stipulations attached. For example, your clients might say to the children, “We're giving you this money because we trust you, but we also want to see how you handle it, because there's more money behind this gift.”

NATURE

There is no right way to structure this type of gift. The age of the children makes a difference, of course, as does the family's financial circumstances. Additionally, depending on the size of the transfer, proper reporting of the potential “gift” should also be considered. However, the most important aspect of any living legacy agreement is the quality of intergenerational dialogue.

Real world example

A client recently helped his daughter and son-in-law put a down payment on their first home. They are both gainfully employed, but without the help they could never afford to leave their city residence and become suburban homeowners. The young couple has been married for 18 years. They have worked hard and become good citizens and excellent parents. They lived on their salaries, raising two children and sending them to private school. Their family deserves a comfortable home. The parents wanted to transfer some assets today instead of waiting until they were no longer around to see the new family enjoying the gift. Helping to structure the most effective means of transfer was relatively easy for us.

Each parent must judge how responsible their children are and what level of financial commitment they want to make. It's all about facts and circumstances. Parents do not want to spoil their children. At the same time, they do not want to ignore the issue of inheritance. Parents don't want children to be completely unprepared for, say, a $15 million inheritance when they die. It's never too early for clients to talk to kids about why they're doing what they're doing and what the future looks like.

Four Pros

1. Tax benefits. annual gift tax exemption for 2024 it is $18,000. Your clients can give $18,000 to each person in a calendar year ($36,000 for a married couple) without having to file a federal gift tax return or having it count toward their lifetime exclusion amount .
2. Shared experiences. As mentioned above, helping children with a down payment on a home investment, family trip or business allows your client to share in their joy – not possible if they had expected the children to receive their inheritance after they die.
3. Financial relief. This includes relief from student debt, large medical bills, excessive mortgages, or special needs care for a grandchild.
4. Transfer of property. This is possible if your customer uses a portion of the current “exemption” amount now. Future asset growth is outside of your client's estate, which can lower their future estate taxes.

Three against

1. Loss of incentives. Even if the living inheritance is structured gradually, some children may lose the incentive to earn as much money as possible.
2. Giving too much. Sometimes, parental love and generosity lead clients to give their children far more than they can afford to maintain their lifestyle in an era of escalating health care costs, inflation, job insecurity and 30-year retirements .
3. Family dynamics. Make sure your client's well-intentioned living legacy to a child doesn't create family friction with other children (or a spouse). A counselor can be especially helpful here.

Other tools

Other tools exist to help children without spoiling them. For example, charitable trusts can help your client leave a steady stream of income to their children. Your client can create a trust that will produce income for the client and their spouse for the rest of their lives and then name the next generation as income recipients. That way, the kids get an income stream they can't break. It's not an asset they can spend, but they have a steady stream of creditor-protected income that can last them the rest of their lives. And if the child's marriage (or marriages) ends in divorce, the money stays in the family. It doesn't suit the ex.

Of course, there are many estate planning tools to use to protect future wealth. But here, we're talking about speeding up the process with an actual inheritance to enable heirs (and parents) to experience joy now rather than later.

The sweet spot

Warren Buffett is famous for saying, “I want to leave enough for my children to do everything, but not enough to do nothing.” No one knows exactly where that sweet spot is for each family. This is where it comes in.

Randy A. Fox, CFP, AEPis the founder ofTwo Hawks Family Office Services. He is a renowned wealth strategist, philanthropic estate planner, educator and speaker.