Inherited Wealth, When and How Much Money to Pass On?

inherited wealth balance

I mentioned in my Introduction to this blog that I am not just writing this blog to share my knowledge, but also to gain more myself. This post is a prime example of that. While writing this post I initially delved into complex tax avoidance strategies and stretch IRAs and decided that I would write about those another time, because I don’t think I should be using those.  I get so wrapped up in the “How” of things, that I rarely take the time to think about the “Should”.  I think the plan I have below is a better idea than at my death setting up bypass trusts and stretch IRAs to leave several million dollars to our great great grandchildren.

My Children and Nephews:


Like most parents I want to set my children up for success in life, what I struggle with is knowing where the line is between helping and hurting. Most public examples of inherited wealth are of the “Rich Kids of Beverly Hills” of the world. A group of spoiled rich kids with no idea of what work is, and are leaches on society. There is a quote from Warren Buffet, “I want to give my kids enough money that they can do anything, but not so much that they can do nothing”.

Of course I am a young parent.  Most likely by the time I pass away my children will be senior citizens as well. My youngest son will be an adult by the time I’m 40.  If I want to help them financially in life, passing on wealth while they are young adults in moderation will be more effective than passing on wealth when I pass away.   All of the below plans also apply to my nephews.

Education

The most basic thing I can do for my children is to teach them a good work ethic. My parents were able to do this, although it took them much more effort than it probably should have.  I know I had to frustrate the heck out of my dad; most of my useful years between 11 and 17 I was reluctant to work, or try to earn money. It took a dose of the real world when I was 18 to realize that those lessons had a point, and I started to apply them. If I can get the basics of work = money and save more than you spend ingrained in them, I think they will be okay.  I need to teach them to have a thick skin and to endure hard work in difficult environments with enthusiasm and a positive attitude.

I want to be able to pay for their education. My kids are in a promise zone school district, which renders the first two years at a community college free to us. We will let them stay at home as long as they are being responsible.  My parents paid for my sister and myself to go through college, and I want to help these kids with higher education costs as well.

Everything here is also based on our ability to help, it isn’t a guarantee. We have to first save for our retirement before helping them get started. We may be able to help our youngest nephew more than our oldest nephew, because there is a 10 year age difference. This doesn’t mean we don’t want to help him as much, but we will obviously be in different life stages at age 40 than at age 50.

Retirement Savings

I’ve done very well financially in my first decade as an adult, but I’ve made my share of mistakes. One of those has been that until last year retirement savings wasn’t a priority. We spent so much on home formation, raising children, building our careers, and just getting started that it just wasn’t in the budget.

What I would like to do for my children is to help them by offering a match for their retirement accounts once they start working. The match will have a maximum, based on our financial situation, but it will provide one more carrot to prioritizing retirement savings. I would aim to do this for 10 years total for all 6 boys.  I would like to see my kids making at least $5,500 a year by Age 15, maybe even sooner.  By doing that much they would be earning all 4 social security credits, earning enough to max their IRA, and still owe no federal income tax.  The work experience would also be extremely helpful.

Launching costs:

I want that when my children are ready to move out, they are set up well financially. I am already encouraging my oldest son to start long term savings for a car, so that by Age 16 he has a decent car that will last him a while.  I can see these boys graduating college, debt free, with a strong work ethic, a healthy Roth IRA, and a pile of cash; nothing gets better than that!

Gift Tax:

After we are retired and have amassed more wealth than we will ever be able to spend, I plan on disbursing inheritance while I am still alive.  I would rather give a little money more often and earlier, than a large chunk upon my death.  The IRS allows for $13,000 of gifts, per person, per year, tax free. This means a married couple could give $26,000 to each individual we want to tax free.  I doubt we would be giving anywhere near this much in any year to any one person, but the concept is the same, tax free transfers of wealth while still alive.

My Wife:

Mrs. C is not into finance and numbers. At all. She is thrifty, and smart and gets the basic concepts of what we are doing, but her idea of a good time is certainly not analyzing spreadsheets and tax documents.  Because of this I have a long term plan for our wealth management set up and printed out for her in “The Legacy Drawer” so that if I were’t around, she would have an easy to follow plan for continuing to build wealth and manage money effectively.

My grandchildren, great grandchildren, etc.

As Dave Ramsey says, I want to change the family tree. If I can set up my children and nephews as I plan to, they will be in good positions to do the same for their children, and so on.   At this point we would have a tradition of teaching and learning, a respect for money, and each generation would hopefully pass it along to the next.  There should be no need for us to leave a massive estate to our great great grandchildren.  I think they would respect smaller amounts of purposeful financial help coming from their parents better than a large sum of non-earmarked money from their great great grandparents.  In my viewpoint, with this system, everyone gets SOME help, but not so much that they receive an entitlement mentality.

 

What are your thoughts and plans on passing on wealth?

 

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. Check out the Action Economics archives section for all past posts.

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