How to Give Money to Your Children

     B and I recently redid our wills, and this got us thinking about how -- and how much -- money to leave for our children and grandchildren. Then we realized we are not alone. Over the next couple of decades by some estimates Baby Boomers will leave around $30 trillion to their Gen-X and Millennial children.

     Of course the answer to how much we give away is: whatever is leftover after we die, minus a few minor bequests to a couple of favorite charities. But of course the issue is more complicated than that. For example, should we give some money to our kids now, while they're still young and could really use it to buy a house, pay for day care, or start a college fund for the kids?

     For some clear and sensible advice I turned to my financial guru, Jeremy Kisner, Director of Financial Planning & Senior Wealth Adviser at Surevest Wealth Management in Phoenix, AZ. He has covered various aspects of the issue in his blog, Clear and Concise Financial Advice, and so with his permission I've cribbed some of his counsel.

     Can you afford it? The first thing to consider is: Can you afford to give away assets now without concern that you may run out later in life? The last thing you want to do is give away money, then become a burden to your children in a few years when they themselves are pressed for money to send kids to college or save for a retirement of their own. You can give money more confidently if you have long-term-care insurance to handle future medical expenses and you have guaranteed income sources such as Social Security and pensions that cover all or most of your living expenses.

     Will an inheritance affect the recipient's motivation? Many clients who have substantial assets earned them on their own. In fact, 80% of millionaire households did not inherit their money or enjoy any kind of windfall. These people are generally proud of the struggles they went through and the prudent financial decisions they made. Ironically, they then often want to make life easy for their children and grandchildren. Paving an easy path for children can deny them the pride-inducing sacrifices that make life's journey meaningful. This is less true if you are gifting to children who are older (in their 50s or 60s), and also less true for gifts that provide experiences, such as sponsoring  family vacations or reunions, or subsidizing educational expenses.

     Will you give equally? There is almost nothing you can do to create more hurt feelings and dysfunction in your family than gifting unequally among a group of children or grandchildren. It may seem reasonable to support one child or grandchild more than others, either because one child needs more help, or one child wants to start a business or go back to school. Just be careful. You don't want to be perceived as playing favorites.

     But does equal always mean fair? My advice is to leave equal bequests to your children and grandchildren, unless there is a clear and persuasive reason for the inequity. You should always communicate why you are making an unequal distribution, either while you are alive or else by leaving a letter with your estate-planning documents. This can be uncomfortable to do, but your children will likely come up with their own explanation (e.g. my parents had a favorite child, and it wasn't me!) if you don't communicate why you made the decisions you made.

     What about giving to charity? I also recommend a conversation or letter explaining why/if you're taking some of "their" inheritance and giving it to a charity. It may seem as though you shouldn't need to explain what you do with your money, but better to err on the side of oversharing, because hurt feelings can last a lifetime and overshadow all the good times you had together.

     What are the tax ramifications? To the IRS it makes little difference whether you make your bequests during your lifetime or after your death. In 2019 you can transfer up to $11.4 million  without the gift being subject to federal gift or estate taxes. (Some people think this amount is too large, contributing to inequality, but as things stand it will slowly get larger since the amount is indexed to inflation.) You are also free to give up to $15,000 annually to as many people as you like without owing any federal gift tax, or using up any of the $11.4 million lifetime exemption. You can gift more than $15,000 in a year, but you must file IRS Form 709 to let the IRS know that you are using part of your lifetime exemption. All these amounts can be doubled if you and your spouse each make a gift.

     Is it better to give cash or appreciated assets? Parents usually give their children cash, because it's the easiest thing to do. However, when assets such as stocks or real estate are passed with your estate the recipient steps up the cost basis to the time of your death rather than using your original cost. In the event you have substantial assets, or assets that have appreciated in value, it's probably a good idea to discuss your strategy with a financial adviser.

     How do we talk about this? It's important for people to have open, honest communication about money with family members before they inherit assets. This does not mean the kids need to see copies of your financial statements. You just want your beneficiaries to know what to expect -- and you can use these discussions to pass on your values along with the money. One way to do this is to tell personal stories  -- some of them may even be humorous -- about the risks you have have taken and the sacrifices you've made in order to build a successful business or career. Gifts that are shared without purpose or intention can feel like welfare. Beneficiaries tend to have a greater sense of ownership and responsibility when they are included in family discussions about bequests, however generous or modest they may be.