Couples or single parents fortunate enough to have saved more than they need during their lifetimes face the decision of who gets the rest. Giving kids too much too soon risks emotional harm. Never telling them that they may inherit some money is also a disservice. A better strategy is to transfer wealth gradually.
Five benefits of gradual wealth transfer
If you have more than you will need and more than you wish to allocate to philanthropy, then transferring some of your assets to your kids when they are in their 20’s, 30’s and 40’s:
- Helps them when they may need it most for better housing, childcare assistance, or reducing expensive debt.
- Permits them to learn by making spending or investment mistakes on lesser amounts of wealth.
- Offers them the freedom to leave an abusive boss or relocate to find better employment.
- Provides you the ability to assess whether you wish to continue to transfer wealth to your kids or change your strategy.
- May help reduce taxes if you have a taxable estate when you die.
If you are concerned that your kids’ source of financial education is TikTok, consider registering them for our free Financial Foundations educational (email-based) program.
Gradual transfer is better than too much too soon.
The amount of wealth that can be gifted to your kids will decrease at the end of 2025 unless there is a change to the tax code. Some parents, fearing less favorable future estate tax policies, may choose to transfer as much wealth as possible to their kids now. A benefit is that all future appreciation may avoid estate tax. The risks are that your kids may be less motivated to earn a living or may miss out on gaining the self-confidence that comes from personal achievement.
Don’t wait until you’re dead to tell them.
The first time your kids hear how much they may inherit should not be at the reading of your will. Irrespective of the size of any inheritance, parents should find opportunities to share their plans in broad terms with their kids. There is no need to indicate specific amounts. If your values include leaving a sizeable percentage of your assets to charity or you plan to leave unequal amounts to your kids, explain your rationale now. The reading of your will should provide no surprises and should not create animosity among your kids.
Consider annual gifts of cash.
The simplest approach is to gift the money directly to your kids. Amounts gifted are removed from your estate and provide them with the opportunity to balance current needs with future goals. Depending on their earnings, they may be able to take advantage of tax-free investments such as a Roth IRA or consider ways to save for future needs.
Another gifting strategy could be to help fund your grandkids’ education by contributing to a 529 savings plan or by paying the school directly.
The benefit of a trust for larger wealth transfers
A trust can be a great vehicle to hold substantial wealth. The assets are owned by the trust and the beneficiaries will only receive what is stated in the document. Trusts that can be changed (called “revocable trusts”) provide maximum flexibility but fewer protections and tax savings. Irrevocable trusts, on the other hand, may offer more attractive benefits at the expense of less flexibility to adapt to changing circumstances. A best practice is first to write your objectives for the trust clearly, then ask an estate attorney to draft the document to achieve those objectives.
For any trust, it is important to choose the trustee and successor trustees wisely and for them to fully understand what they can and cannot do. The trustee is a fiduciary of the trust’s assets and can be held liable for breach of their duty, even if the trustee is a parent of the beneficiaries.
Appreciate that the future is uncertain …
There is a saying that the only certainties in life are death and taxes. This is incorrect. The U.S. tax code has varied materially over time, often with each change of control of Congress. At present, about half of our Congressional Representatives want to eliminate the estate (“death”) tax, while the other half want to increase it. For your kids’ inheritance, the estate tax will be based on the tax code in effect at the time of death, typically at the passing of the second spouse. Since that may be many years and many Congressional elections from now, there is no way to know what the taxes will be.
… and you cannot time your death.
While eventual death is certain, the timing is not. In a previous blog, I shared the story from early in my career of a client who postponed finishing his wealth strategy and met with an untimely death.
Your (and, if married, your spouse’s) gifting strategy must work irrespective of who dies first and when. We recommend, with the assistance of your estate attorney and wealth advisor, calculating how much each of your kids would inherit under three scenarios:
- Both parents die now, older spouse first.
- Both parents die now, younger spouse first.
- No one dies now, but you want to change how much your kids get.
The complexity of the U.S. tax code may drive families to excessively complicate the ownership of their assets. Multiple trusts, in combination with various taxable, tax-deferred, and tax-exempt accounts can lead to dozens of accounts to administer. While complexity may provide optimal tax efficiency, it will create costs and delays for your executor.
If you do decide to transfer some of your wealth to your kids, consider the benefits of a gradual approach, keeping it simple which still achieving your objectives.