The article reprinted below was recently published on JCFLegacy.org and provides questions to consider around the topic of gifting assets to children.
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Seven Questions on Gifts to Children
Many questions arise when we consider the options for giving to children. Why should we give? When, what and how should we give? Will gifts impact the self-esteem and initiative of the child? Can a gift plan transfer values to children? These are all very important questions. Clearly there are better ways to give and a prudent parent will consider carefully the manner, nature and amount of gifts. If the gifts are given in a proper way, they can be very beneficial for the child. Alternatively, gifts given at the wrong time or in the wrong amounts can lessen the initiative and even weaken the character of the child. Thus, it is important to make gifts in the optimum manner at the right time.
Why Give to Children? There are several reasons why you may choose to make gifts to children during life. Some parents wish to start the inheritance process. If they have substantial resources, it is desirable to begin the inheritance while the children are in their 30s, 40s and 50s. Many children can use the help at that time to start careers, purchase a home and assist in the cost of raising their own children. Another reason for making gifts is to teach conservation. Most parents who have significant resources have been careful to conserve their assets and build them up during life. By making transfers of assets during life, the parents can see how the children handle those assets and, in turn, offer advice and encouragement. In addition, when the parents have the opportunity to see the effect of inheritance on children, it helps to clarify the parents' goals. Goals for inheritance should include the amount transferred during life, the time of transfer, the principal and income amounts and times for transfer of those items to family in the estate. Starting the property transfer process during life enables parents to understand how to plan for the optimum inheritance for children. When Should a Parent Start Giving? There is both an easy answer and a difficult answer to this question. First, parents should start giving to children when they reach the "age of financial responsibility." But what is that age? Some children reach the "age of financial responsibility" at 25, while others might not attain that status at age 75. Another factor that affects the "when to give" question is the resources of the parent. Many people in our society live to age 80, 90 or even older. The parents should make certain that they have sufficient assets to provide for long-term care, if that is needed. Some parents may wish to purchase long-term care insurance prior to making gifts to children. Alternatively, other parents of retirement age may determine that they have adequate resources to provide for their long-term care and can make gifts to family members. In making this determination, you will want to consider pensions, Social Security, IRAs and other assets. If a parent determines that there are sufficient assets and that the children have reached an appropriate age (which in most cases is when children are in their 30s, 40s and 50s), then the parent may choose to start making gifts. What Should I Give? In the book The Millionaire Next Door, the authors studied the impact of gifts of cash to children in their 30s and 40s. The essence of their research was that, for most children, gifts of cash are typically spent. Furthermore, with the exception of elementary school teachers and college professors, children in other professions who received cash gifts actually had less in savings by retirement age than those who received no gifts. Those who received cash gifts not only spent the gifts, but also continued to spend other personal cash and ended up with smaller estates than those who had received no gifts. If parents are not concerned about whether or not the gift is spent, then the gift of cash is appropriate. However, many parents make gifts to children with the hope that the child will invest and build up some reserve assets. If the hope is that children will invest and begin to build their estates, then gifts of property show much more promise. For example, many parents hold stock and can transfer shares by gift to the children. Alternatively, some parents hold real property or have created family limited partnerships and can transfer either the real property or the partnership units to children. If the gifts are less than the annual exclusion amount per parent, per child each year ($17,000 in 2023 and potentially higher in future years), then the gift is not subject to gift tax. It should be noted that the child takes the cost basis of the parent when property is gifted. Thus, if the child were to sell the appreciated stock or land, he or she would have to pay a capital gains tax. Many parents actually consider this as a favorable circumstance, since their intention is for the child to hold the asset. If there is significant appreciation, these parents deem it beneficial since that potential gain could dissuade children from selling the asset, paying the capital gains tax and spending the money. How much can be transferred using annual gift exclusions? There are cases in which appreciated stock gifts were held by family members and there was significant value transferred. After a ten-year period, the stock transferred with annual exclusions may be worth several hundred thousand dollars. In one case, the parents used gift exclusions over a period of 30 years and the children held the gifted stock. At the conclusion of that gifting program, the children were all multimillionaires—and all with zero gift or estate tax! Should I Give Different Amounts? Most parents will attempt to treat all children equally. From the perspective of the child, the gift is viewed as a representation of the love of the parent. Thus, it seems appropriate in most circumstances for there to be equal transfers to the children. However, most rules have reasonable and logical exceptions. The two most common exceptions in this area are the special needs trust and a family business. If one child has a disability, the rest of the family understands the need for additional provision for that child through what is commonly called a special needs trust. This is a trust with an independent trustee who has discretion to make distributions to the child, but is not normally required to do so. The special needs trust makes provision for the maximum benefit of the child and could potentially allow some beneficiaries to also receive government benefits. The other exception to equal treatment for children may occur with a family business. If some children are involved in the business and other children are not, it is desirable to provide a substantial inheritance for all children. However, maintaining business viability may require the transfer of a majority of the business interest to the child that is involved in the business. In addition, many parents believe that transfer is fair because the efforts of the children in the business have contributed to the overall growth of the business and the overall growth of the parents' estate. These are delicate questions to which parents should give careful thought, but in the case of the special needs trust and the family business, it is common for one child to receive a greater benefit than the other children. Will My Gift Decrease Motivation and Self-esteem? This is a concern of all parents. If an estate is substantial, it is a very important issue to consider. Nearly everyone knows of cases where a large inheritance was transferred to an individual and it was spent in very unhealthy ways. Indeed, sometimes the size of the inheritance contributes to tearing down rather than building up the child's character. Perhaps the best gift most parents and grandparents should consider is education, which can be used during an entire lifetime. Because one competes with other students in the class, a gift of tuition for education is a good character-building exercise. A second excellent gift that may not involve significant financial resources is help with a career or business. Many businesspeople are able to assist their children in starting careers or businesses through advice and financing. These opportunities are excellent because the child then has the self-esteem derived from building a career or a business of his or her own. Another strategy is to wait for a reasonable level of maturity. Some parents wait until the children are in their 40s or 50s to start gifting programs. At that time, values are more likely to be established for the children and they are able to make productive use of the property. Why Don't My Children Think Like Me? This question surely has crossed the mind of nearly all parents. A parent may consider a particular property or asset and say, "If I had that property, this is what I would do with it." As all parents know, children quite often hold different opinions. They have generally not been tested in as many different circumstances as their parents. The children need "time to learn." When transferring an inheritance to children, parents need to remember that they have quite often acquired that property over 30 or 40 years. The parents had many opportunities to learn the value of thrift, conservation, investment and careful planning. Children will not learn these principles from a ten-minute discussion with their parents. They will need to learn some of these lessons out in the real world, operating with real money and real property. It is inevitable that some children will make mistakes. However, their parents also made mistakes along the way. This is the educational part of the gift process. Parents should be willing to provide "opportunity to make mistakes" property to their children. This does not necessarily mean that the property must have enormous value. However, there must be some value to the property. This "opportunity to make mistakes" property can best be gifted during life. After one or two such episodes, the children may suddenly have a greater understanding of some of the values held by the parents. How Do I Support Charity and Transfer Values to Children? One goal of parents is to teach values to children. We all hope that our children will be honest, loving, loyal, faithful, true and upright. How do you teach those values? First, values are caught and not taught. Fortunately, many parents have shared the lesson of the importance of family and extended family with the children. The family includes children and, in some cases, nephew, nieces and other relatives. The extended family includes the wider group of individuals who are helped by charities that the parents support. One especially effective way to teach the principle of helping others is to model that behavior through support of charities that benefit the extended family. Children realize that they are here on this planet not just to acquire the best homes, fastest cars and most exotic vacations, but also to find a sense of purpose and value through assisting others. The extended family example of the parents is one of the best lessons that encourage children to acquire values similar to those of the parents. This lesson is taught during life both through contribution of time and gifts of cash and property to charity. In addition, a very effective teaching method is to use planned giving concepts. These planned giving opportunities can provide benefits for children and a remainder to charity. In using these gift plans, the parent teaches the child to consider both the family and the extended family in planning. If major benefit for the extended family can be realized through tax savings, this becomes a particularly powerful lesson. Gifts to children during life can accomplish many goals and objectives. Parents need to give careful thought to the children's needs and opportunities. If your assets permit, you may have the ability to give children "time to learn," provide them the "opportunity-to-make-mistakes" property and to facilitate the transfer of values. Truly, these objectives make giving during life an important part of your efforts to "help the child become a better person."
To discuss charitable giving and involving your children, please contact David Snyder at 856-673-2571 or dsnyder@jfedsnj.org.
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