Is it Better to Give or let Kids Inherit?

Should an inheritance remain an inheritance, given to children only after their parents die, or should parents use some of the money to help their kids out while they are still living? That’s a question that many families grapple with, reports a recent article “When to Give Inheritance Money to Your Kids,” from The Wall Street Journal.

Not every family can afford to give their children an advance on their inheritance, but for those who can, there are some things to consider:

Some financial advisors believe that “gifting with warm hands” is a better way to go. Parents can enjoy seeing their children and grandchildren benefit from having the help, based on when it is needed. Decoupling an inheritance from parental death is a happier scenario than the alternative.

Others believe that current financial needs, taxes and the tax situations of the parents and children ought to be the deciding factor. First, is there enough money for the parents to live comfortably in retirement? That includes being prepared for the cost of an unexpected health crisis that might lead them to need short- and long-term care. Follow that by understanding the tax situation of both parents and heirs. Once those answers are fully formed, then a discussion about gifting can move forward.

Another school of thought is to stop saving every penny and enjoy life to its fullest right here, right now. Some people are more concerned with maxing out their 401(k) plans than enjoying their lives. A healthy balance between protecting assets for later years, creating wealth for the next generation and having some fun too is the goal for many families.

Regardless of how you see your situation, one thing is sure: if you have any concerns about how your children will handle an inheritance, make a gift while you are living. You’ll get to see how they handle it, responsibility or recklessly. This may inform your planning for the future, including the use of spendthrift trusts.

The pandemic has forced many people to confront their own mortality and consider how they really want to spend the rest of their lives, as well as their assets. Many parents are preparing to make changes in their estate and gifting plans to accommodate needs that have arisen as a result of COVID’s economic impact.

Talk with your children about finances—yours and theirs. Discuss their needs, especially if they have been unemployed for an extended period of time. If they need money for something critical, like paying for health insurance or catching up on student loans, the gift should be made with a clear understanding of its intended purpose.

Your estate planning attorney can help create a plan that works while you are living and after you have passed. You can also see my thoughts on how to leave to your kids in a way that protects them here.  https://www.galliganmanning.com/protecting-money-from-a-childs-divorce/

Reference: The Wall Street Journal (April 30, 2021) “When to Give Inheritance Money to Your Kids”

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How Does a Charitable Trust Work?

Charitably-inclined clients often utilize charitable trusts as they give to charities while providing income and estate tax benefits.

A charitable trust can provide an alternative to meeting your wishes for charities and your loved ones, while serving to minimize tax liabilities. Attorneys often utilize them for charitably-inclined clients to reduce estate tax or capital gains tax on assets directed to the the charitable trust. There are pros and cons to consider, according to a recent article titled “Here’s how to create a charitable trust as part of an estate plan” from CNBC. Many families are considering their tax planning for the next few years, aware that the individual income tax rates may go up in the near future, as well as anticipating a drop in the estate tax exclusion amount.  Although the values will be changing, you can see this article for a decent overview of the estate tax itself.  https://www.galliganmanning.com/what-exactly-is-the-estate-tax/

Creating a charitable trust may work to achieve wishes for charities, as well as loved ones.

Speaking very generally, a charitable trust is a set of assets held in a trust to benefit a charity, or possibly a charitable foundation created by the donor, for a period of time.  The time could be very short term for income tax benefits, or much longer term for estate tax benefits. The assets are then managed by the charity for a specific period of time, with some or all of the interest the assets produce benefitting the charity.When the period of time ends, the assets, now called the remainder, can go to heirs or even kept by the charity (although they are usually returned to heirs).

A charitable trust allows you to give generously to an organization that has meaning to you, while providing a generous tax break for you and your heirs. However, to achieve this, the charitable trust must be irrevocable, so you can’t change your mind once it’s set in place.

Charitable trusts provide a way to ensure current or future distributions to you or to your loved ones, depending on your unique circumstances and goals.

The two main types are Charitable Remainder Trusts and Charitable Lead Trusts. Your estate planning attorney will determine which one, if any, is appropriate for you and your family.

A Charitable Remainder Trust, or CRT, provides an income stream either to you or to individuals you select for a set period of time, which is typically your lifetime, your spouse’s lifetime, or the lifetimes of your beneficiaries.  The remaining assets are ultimately distributed to one or more charities.

By contrast, the Charitable Lead Trust (CLT) pays income to one or more charities for a set term, and the remaining assets pass to individuals, such as heirs.

For CRTs and CLTs, the annual distribution during the initial term can happen in two ways; a Unitrust (CRUT or CLUT) or an Annuity Trust (CRAT or CLAT).

In a Unitrust, the income distribution for the coming year is calculated at the end of each calendar year and it changes, as the value of the trust increases or decreases.

In an Annuity Trust, the distribution is a fixed annual distribution determined as a percentage of the initial funding value and does not change in future years.

Interest rates are a key element in determining whether to use a CLT or a CRT. Right now, with interest rates at historically low levels, a CRT yields minimal income.  The key benefits to a CRT include income tax deductions, avoidance of capital gains taxation, annual income and a wish to support nonprofit organizations.

Your estate planning attorney can work with you to determine whether a charitable trust  will serve your charitable strategy and achieves your goals of supporting the charity and building your legacy.

Reference: CNBC (Dec. 22, 2020) “Here’s how to create a charitable trust as part of an estate plan”

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Is Transferring the House to Children a Good Idea?

Clients frequently ask this question, especially as mom or dad is aging and perhaps living in assisted living or some other senior care arrangement.  Many try to do so using online forms, and find later that it was a mistake.  Transferring your house to your children while you’re alive may avoid probate, but gifting a home also can mean a rather large and unnecessary tax bill or could effect eligibility for long term care benefits. It also may place your house at risk, if your children get sued or file for bankruptcy

You also could be making a mistake, if you hope it will help keep the house from being consumed by nursing home bills.

There are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since died, says Considerable’s recent article entitled “Should you transfer your house to your adult kids?”

If a parent signs a quitclaim to give her son the house and then dies, it can potentially mean a tax bill of thousands of dollars for the son.

Families who see this error in time can undo the damage, by gifting the house back to the parent.

People will also transfer a home to try to qualify for Medicaid, but any gifts or transfers made within five years of applying for Medicaid can result in a penalty period when seniors are disqualified from receiving benefits.  A capable elder law attorney can advise you on better ways to address this, as well as potential corrections if necessary.

In addition, transferring your home to another person can expose you to their financial problems because their creditors could file liens on your home and, depending on state law, take some or most of its value. If the child divorces, the house could become an asset that must be divided as part of the marital estate.

Section 2036 of the Internal Revenue Code says that if the parent were to retain a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift. However, there are rules for what constitutes a life interest, including the power to determine what happens to the property and liability for its bills.

There are other ways to avoid probate. Many states and DC permit “transfer on death” deeds that let homeowners transfer their homes at death without probate.  Texas has both transfer on death deeds and “Lady Bird Deeds,” and an attorney can advise you on the differences and the best way to utilize them with your estate plan.  An excellent solution is to use a living trust which allows assets it owns or receives at death to avoid probate.  Having the trust own the property, or possibly using a deed to convey the property to the the trust at death, are excellent solutions.

If you are interested in learning more, please see this article for various ways to own and hold real estate.  https://www.galliganmanning.com/how-to-own-your-real-estate/  

In sum, there are many unexpected consequences to transferring your home to your children, so it is important to discuss the best way to convey the home to your loved ones with an attorney.

Reference: Considerable (Sep. 18) “Should you transfer your house to your adult kids?”

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