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WANT TO DONATE TO charity? It usually makes sense to give now rather than upon death. You’ll get the pleasure of helping a cause you care about, and your generosity may also earn you an immediate tax deduction.
But what about giving money to your children or other heirs? This is a much trickier question, one I’ve thought about a lot ever since my first child was born almost 35 years ago.
Giving now. When I started reading about investing in the 1980s, I was immediately captivated by the idea of stock market compounding and how—if given enough time—it could turn modest sums into significant wealth. No doubt this was partly because I was in my 20s and barely getting by on a junior reporter’s income. A modest sum was all I could muster, but at least I had time on my side.
The magical combination of time and compounding seemed even more relevant to my two kids, who were born in 1988 and 1992. I set out to ensure they’d reap the rewards of compounding, opening accounts to help pay for a future house down payment and for their retirement.
At the same time, there was another notion rattling around in my head: I wanted Hannah and Henry to have a sense of financial security in their early adult years, something that had eluded me. And my plan worked. I remember Hannah calling me shortly before she graduated college in 2010.
Life was about to get all too real for her and her cash-strapped friends, as they contemplated the nitty-gritty of starting jobs and renting apartments. Hannah suddenly had an intense interest in her Vanguard Group account, which I’d been mentioning for years. “I can’t believe I have so much money,” she said, awed by her account balance.
In the years since, I’ve come to realize there are additional reasons to give money to your children early in their adult life: The dollars involved will likely be more helpful to them than to you, plus you’ll have the pleasure of seeing them enjoy the money. To be sure, there are also risks: The money could get squandered and it could dent their ambition.
Will that happen? The good news is, as a parent, you should have some sense for how your kids will handle your largesse—and you can also influence the outcome, by trying to teach them sound financial values from an early age.
On top of all this, there are some purely financial reasons to give away money now rather than waiting until death. You get the subsequent growth of those dollars out of your name, which could reduce the hit from federal and state estate taxes. It could also allow you to qualify for Medicaid, should you need help paying for a nursing home—a goal that might be important for those with modest assets who realize that paying long-term-care costs could wipe out their savings within a few short years.
After investing a fair amount in my children’s names when they were younger, I’ve been less generous over the past decade or so. But I’m rethinking that. I’m confident I have enough for my own retirement and I’m confident my kids would be responsible with any money I give them, plus I’ve been eyeing Pennsylvania’s inheritance tax, which would potentially snag a portion of whatever I bequeath. On the other hand, if I give them money now, it would likely mean pulling from my traditional IRA, and I’m not anxious to have that extra taxable income over the next few years, given my current focus on making large Roth conversions.
Giving later. If there are so many sound reasons for giving now, why wait until death? The No. 1 reason: You don’t want to hand over money you might later need for your own retirement.
But even if you can afford to give your children or other family members a healthy sum during your lifetime, you might still want to hang onto the money for the time being. For starters, you get to retain control of the money, which might be important if your kids have little investment savvy, or you worry about how they’ll use the gift, or you fear your children could lose a chunk to a divorce or a lawsuit. There’s also the big behavioral fear: You might want to ease your kids’ financial path, but not so much that they fail to develop good financial habits.
Moreover, depending on when you die, the lump sum you bequeath might arrive at an auspicious time, allowing your children to, say, pay off their mortgage or foot the bill for their kids’ college costs. It could also help them across the finish line to retirement or allow them to live somewhat more comfortably. A gradually rising standard of living over the course of our life can be a source of ongoing happiness, and your estate might make that possible.
To be sure, as some have noted, if the parents die in their 80s, their children may already be retired or close to it, so any inheritance might do little good. I think that’s a valid argument. On the other hand, an inheritance at that point may allow your kids to pay it forward to the next generation—or, alternatively, you could do that yourself, directing part of your estate to your grandchildren.
While compounding was a notion that captured my imagination four decades ago, “paying it forward” is an idea that captivates me today. As someone who has amassed modest wealth, my estate won’t allow my heirs to quit the workforce and lead a life of leisure, and—in any case—I don’t think that’s desirable. There’s great happiness to be had in striving toward goals we care passionately about.
But if used wisely, the money I bequeath could ensure the Clements clan remains firmly entrenched in the middle class for at least a few more generations, paying for decent educations and fending off financial misery. That might sound like a modest ambition. But it’s a legacy I’d happily have attached to my name.
How much financial help should parents give their children? Offer your thoughts in HumbleDollar’s Voices section.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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I am 83, and my wife is 80. We have no children and decided to leave most of our estate to charities we are familiar with. After we are reasonably sure we will have sufficient income for our remaining years, we will give three ways: First, we will provide a modest amount of cash to nieces and nephews (and one or two friends). Second, we will give some money to local charities we know when they are matched. Our IRAs are invested with Vanguard, so to minimize taxes, we use the QCD method to donate to charities. We monitor the amount we give using QCDs to ensure we have sufficient funds for life. We use our home equity loan for any expenses that exceed our income. Finally, our estate will pass to charities using Donor Advised Funds (DAFs). Vanguard Charitable (a DAF) permits one to avoid or minimize taxes and designate when and the amount you give to each charity in a lump sum or annually for a specified period. The DAFs permit us to develop an agreement, in writing, each charity will use the donations charity. Our estate plan clearly defines our wishes. Most of these transactions are fixed in that plan, so we do not burden our Executors. One additional point is that when our home is sold, the net proceeds (sale price minus home equity loans and other debts) will be donated to our DAF and distributed like our Vanguard IRA.
We are comfortable with our plan that ‘gives now’ plus leaves a legacy for us.
I give to charity now because people need help now, and because I believe in giving back now. I autopay just a few hundred dollars a month to medical and emergency aid organizations that I know will use essentially 100% of my donation for the good stuff and not “administrative” costs. Any charity that mails me regular newsletters or “match” solicitations is off the list (I switched off Americares and onto Direct Relief for that exact reason).
I note lots of comments below about giving to children and grandchildren. I’m surprised and, as a non-parent, genuinely curious — do most people believe that gifts to the kids and gifts to charity fall into the same class of generosity? Do the two subjects mix so easily here because both kinds of giving require planning and budgeting?
Normally I don’t post twice on a subject, but I remembered something that always intrigued me about estate planning. I worked for a company that sold life insurance and we received an application one day that had a list of beneficiaries that included 30 people. They would each receive small amounts, but the insured wanted them to have a “remembrance.” Just an interesting way of saying, “Thank you for being part of my life.”
I like the idea of giving modestly and regularly now rather than later. With no children in the picture, charity is my choice. I like to support local, smaller and efficiently-run charities where my giving can make a meaningful difference to their efforts–and my support is so greatly appreciated. For those of us age eligible, Qualified Charitable Distributions (QCDs) are a great way to give from our traditional IRAs with their multiple tax advantages (like not adding to taxable income and counting towards one’s RMD).
Thanks for starting the discussion on this great topic. I have so many thoughts.
My Grandmother passed when I was 35, her estate was split among each of her living children and grandchildren. Already a frugal CPA, I was on the path to financial independence but inheriting 190k at 35 provided security and peace I didn’t have before. I’ve not used much of the money but it helped make retirement at 51 possible. The money was helpful but less impactful to my Father, he was already in excellent financial shape.
Last year, my Mother passed away, her estate was split among me, my brother and his daughter. This money will add some luxuries to my life but was not that impactful at 57. However, for my 39 year old Niece, it allowed her to purchase her first home and, if used wisely will be a huge help preparing for retirement.
With my own estate plan, the bulk goes to “kids” currently in their 30’s. If I have a long life, I’ll likely take that down a generation to the kids of these kids. I’m also toying with the idea of creating an educational trust for the descendants of my Grandparents siblings. Those family lines have been prolific where my line is likely to end with my Niece.
I read an article recently about giving with a warm hand rather than a cold one. Giving gifts when alive bring much pleasure while giving after death does not. I don’t think of this only in terms of financial support. Using your resources to create memories with your loved ones can be the most impactful of all. My Grandmother died with plenty of money but very few great memories with her family. I wish she and my Grandfather had taken us on a trip and left us a bit less when she died.
I say give the money now while the kids are raising their own children. (We happen to have enough so we do not have to worry about running out of money.) That is when they need it most. It will not be as helpful if they are at retirement age (unless they have very little at that point).
Here in the northeast even starter homes are very expensive. Decent homes cost well over $500k here. We gave each of our kids 20% down payment for their homes because it would have taken them too many years to accumulate it on their own.
Renting is close to $3000+ a month here, so it would be hard to accumulate a down payment.
We also give them money from time to time and that always helps. All 4 of our kids and their spouses have good jobs so we aren’t worried about them slacking off.
Similar to Jonathan’s experiences, I didn’t want them to have to struggle as we did when starting a family.
An interesting topic to ponder. Many thoughts and questions arise from the article and everyone’s comments…some that I’ve experienced by default. We are all different in giving to family and charities, or receiving an inheritance and how you want to use it. Ones net worth will probably be the guide in what we can and cannot give.
As parents with an adult child going thru a divorce, I’m ecstatic we can help.
Very good article.
Giving to family: I gift to my children each year at the highest level I don’t have to report it. The trickier question is whether I start to do it for my grandchildren. So far I have elected not to do that, since only one of my children has children of her own. It seems to unbalance things. Is that wrong?
Giving to charity: My hardest decisions here are deciding to whom I should give. I want to give only to a charitable organization with a mission that resonates with me, and that is ruthless in its efficiency, minimizing spending on administration and marketing. I use the web charity evaluator sites, but the job is a lot harder than one might think. Some of the schools I attended have disappointed me by the way they operate, and the missions I value tend to evolve, so I am constantly on the lookout for new candidates.
Consider your Alma Mater that helped you get to where you are, I suppose. That’s kind of what I did.
My wife and I have the same issue, although we don’t have kids, which makes it less clear about how we handle this. Our current estate plan calls for assets to be distributed between our seven nieces/nephews and to charity. We can certainly afford to help some of the nieces/nephews now, but they’re all in different places in life and not sure how to do that equitably. Then there’s the question of whether we even need to distribute our money equitably–as nieces/nephews we have closer relationships with some compared to others.
Interesting article. My journey was similar – setup 2 custodial accounts for the two kids and started gifting stock each year (no 529’s) – eventually when my daughter wanted to buy a house, she was able to dip into it. My daughter got quite a bit of grants from university – I gave her stock for the grants she earned – since I had planned to pay for kids college anyways. My son’s is compounding, 90% stock and 10% cash. They have both started working.
I am curious about one issue I have – I have stocks with lots of capital gains. I was planning to dip into my 401k and other retirement funds first and reduce RMD on them to a 22% or so and plan to leave the stock I have to the kids after I pass away so that they can get a stepped up basis – any thoughts anyone?
This was the perfect think-piece for a Saturday morning, particularly when both our young adult children (and their significant others AND their pets) are all visiting us. It’s the first time we’re all together under one roof since the early days of the COVID19 shutdown.
One option worth exploring: Both our kids received healthy grants and / or scholarships from their respective universities as undergrads. This left us with a bigger than anticipated balance in both their 529 accounts after they graduated. Our initial plan was to let these funds continue to grow on a tax-deferred basis within the 529 in the event either or both pursued grad school. Our backup plan was changing beneficiaries in the coming decades from our kids to (god willing) their own future offspring.
Since SECURE 2.0 passed in December 2022, I’ve been intrigued by another option contained within the law (starting in 2024) to re-deploy leftover 529 funds: transferring a portion of each child’s 529 account balance – in annual increments – into a Roth IRA owned and controlled by our adult children. It’s important to be aware of the numerous rules and limitations regarding these 529-to-Roth transfers contained within SECURE 2.0.
The long-term benefit is that these assets will be transferred off our own balance sheet to our offspring (without triggering a taxable event) over a 6-year transfer period, (subject to a $35K lifetime rollover limit and a max transfer amount of $6,500 per year). The allowable annual transfer limit will likely rise in the coming years, since it is tied to maximum allowable contributions for all IRAs.
One of our children has an employer willing to foot the bill for graduate school and swears that having kids will never be a part of their future (hmmm, I recall invoking a similar sentiment to my own parents 3 decades back).
It’s also worth noting that rules governing the availability of “hardship withdrawals” from IRAs are (generally) a bit more liberal than those contained within 529 plans for non-qualified (non-educational) expenses.
There a bit more number-crunching on this still to be done (along with a healthy dose of prognostication on what our kids financial needs will be in the future) before finalizing this transfer decision. All the same, it’s a worthy exercise to consider now – before the 2024 effective date for 529-to-Roth transfers become effective.
I like your thinking but I do have worries that long term planning based on the current tax code and government rules may not result in the hoped for outcome.
Almost two years ago I decided to begin gifting to my son-in-law to help him establish and fund a modest 529 for a new grandson because, I knew, the impact on college assistance was better, under existing FAFSA rules, if the 529 account was owned by the parent than by the grandparent. That rule recently changed where the grandparent ownership has now become the likely better 529 ownership decision. I have no idea what the better decision will be in 16 years when that grandson may start college.
I am hopeful and expect these ongoing gifts will be used for the benefit of my grandson’s education and think it is financially prudent that I will not have to manage the 529 distribution decisions when I am in my 90’s if I am fortunate to live that long. I hope my ongoing gifts will encourage additional gifts to the 529 by my grandson’s parents and perhaps other family members. The amounts of my 529 gifts should be sufficient to give my grandson a leg up on financing his college education and I also hope the establishment of the 529 will help create an expectation in my grandson of the value of higher education. My gifts alone to my grandson’s 529 will certainly not come close to paying for his entire college and that is what I intend. I make a small monthly gift online directly to the 529 plan and enjoy the feeling I get from doing so.
I was always intrigued that Warren Buffett doesn’t make any direct contributions. People who write to him asking for money are redirected to his sister, Doris, who vets and checks out the request, and the people, before any money goes to them. On the other hand, Buffett has famously made contributions to the Gates Foundation and to foundations run by his children. He said something to the effect that it’s easier to make money than donate it. I didn’t understand that until I started donating money myself. It requires some thinking.
We have two daughters close to the ages of your two kids. The younger one in particular is not good with money, and that’s putting it politely. In general, her executive function isn’t great, and there may even be undiagnosed ADHD going on.
Anyway, we may help her in a specific way in the next few years. Like most young adults in California, she struggles to deal with the high costs of housing, and she has two cats and a small dog, making it that much harder to find a suitable rental. (We advised her against the pets, but oh, well.) We may purchase a starter home as a rental property and have her live in it with a roommate(s). We’d have her pay discounted rent in exchange for “managing” the rental. That would allow her to have a stable place to live without just giving her the money—but the house will be part of her eventual inheritance.
We don’t have grandchildren yet, but if we do, I’m sure we’d also fund 529s for them.
Three of my children are now ages 53, 52 and 48. The oldest each have three children not yet in high school, two of each not even middle school. The 48 year old has a high school senior and sophomore. we also have a daughter with three children, the oldest being a junior.
When I was age 45 my oldest was off to college. I was 55 when our youngest of four graduated college.
That’s quite a difference as retirement and paying for college collide and while we have been modestly funding 529 plans for all 11 grandchildren, it’s hardly a drop in the bucket for total costs.
When and how to give money is a key question with both of us in our 80s. Last year we gave each child a share of our RMD.
Frankly, I’m not sure how to handle this. I know three of the children could use the money now unrelated to college and all could use college assistance.
I started UGMAs for my children when they were born and am now funding 529s for my grandsons. In today’s America the ability to graduate debt free or nearly so from university is a tremendous head start in life, in my opinion.
I started out with UTMA accounts for my first two, then did Coverdell ESAs for all four when that became available. My youngest two of the four ended up in 529s. I opened up accounts when they were born to take advantage of time. All graduated debt free with a paid for used car. I started this process in 1990 and the stock market, for the most part, was a huge financial tailwind for the process. I wonder how the future will turn out in that regard?
Jonathan, thanks for the thoughtful, and thought-provoking, article. You identify the biggest challenge for many folks – how do you know how much you will need in retirement, especially if bad health brings financial woes.
One of the best gifts we can give our children is a well organized, coherent, and communicated estate plan. Second, I want to make sure our financial situation is structured so we will never be a financial burden to our children. Beyond, that ‘m very much in favor of sharing your wealth when it can have its greatest impact.
Not being a financial burden is a worthy goal and our main one as well which is all that keeps us from giving more now. Fear of the unknown.
Great topic, and one of ongoing thought and discussion in our family. Gifts from family have been the seed to help with our daughter’s college and with what we call the “marriage fund”. Both have grown nicely, and will be a help to us all. Given my daughter’s current frugality, I expect a nice sum to be left over after paying for a wedding. There is also a Vanguard account that receives the surprising amount of money my daughter has hoarded over her short life, given that she’s been unemployed since birth.
We also regularly engage in family discussions about money and inheritance that I hope take root and provide guidance during her adult years and after I’m gone. My letters of instructions address wise use of her inheritance, also.
My parents both passed away when I was 60. They never discussed their finances with any of their children except my sister who was their DPOA for finance and executor.
We were building our retirement home two years before they passed without knowing that we would inherit enough to increase our retirement savings by 50%. We are frugal with our money so built a nice, but definitely not luxurious home. Since we inherited the money we have installed some minor upgrades that we wished we could have had when we built, but were not in the budget such as quartz countertops and tile backsplash. We also purchased a new and probably the last Toyota Tacoma pickup to replace the 17 year old one which was still running fine (thus in my mind a luxury purchase). We considered these as gifts from my parents. If we knew we were going to inherit X dollars I wonder if we would have spent significantly more on upgrades when we built the house and tied up the money in a non-liquid asset.
But the greatest gift receiving this money at our age was to be able to leave the rat race of work and retire several years earlier than planned with the knowledge that we were more secure with our retirement savings, and to give both of our children a nice financial gift to allow for one to put a fair amount down on his first home, and the other to pay off the balance of her school loans.
Thus the timing of my inheritance helped two generations thanks to my parents.
Hi Jonathan, this is Chris, great article. In our family, we gave our kids a modest amount when they bought their first homes. We have been so grateful that the last several years a couple of our parents have been generous with us at the holidays with a modest amount of cash and we used it to help pay off our mortgage. We are hoping when we are in our 80s like they are that we may be able to do the same for our kids.
An often unrealized benefit to being a HumbleDollar reader is the comfort that you are not traveling alone and that others are pondering the same issues or walked this way before.
So very true. Another thing is, even though we don’t necessarily think alike, we are at least thinking.
Yes indeed.
A very interesting article. I realize everyone has their own perspectives on this topic and I think it’s a very personal decision. In my own case, For the last 3 years I’ve been following a planned process of distributing my excess cash while I’m alive. One significant reason I’m doing so is that in my extended family I’ve observed 2 cases where the distribution of assets after death didn’t match the deceased wishes. In both cases there were lawyer prepared trusts and detailed instructions. Nevertheless, designing people were able to circumvent the wishes of the deceased. At least the money I distribute while I’m alive I know went to whom I intended. There’s also the joy that comes from giving it and seeing it put to good use. Of course, what works for me isn’t what would work for everyone. But for me, this has been working out well.
Can you explain further how lawyer prepared trusts with detailed instructions were circumvented and how they got away with it? The rightful heirs did not take any action?
Sorry it took so long to answer but I’m on vacation and internet access is sporadic. To your question, I’m sorry but I’d rather not discuss my own families stories at this time. But in the abstract I’d suggest that trying to craft a legal document that can both provide the flexibility to provide for all legitimate needs of the beneficiary and yet not be exploitable by a clever and unscrupulous person is very difficult. The techniques that can be used to defeat a trust (both before and after the death of the principal) can include influencing financial decisions that ultimately result in assets being (unknowingly) transferred out of the trust, challenging the executor’s interpretation of the language of the trust so higher or additional distributions are made, and exploiting the provisions of the trust with fraudulent or excessive claims that go beyond what was intended by the principal, but are (legally) allowed by the provisions of the trust. I’m sure there are other ways as well.