For families considering passing wealth to the next generation, the question isn't always about when to give. It can also be whether it makes sense to give now, later, or both.
Recently, Financial Planner Megan Lyons (link to bio) joined WVXU’s Cincinnati Edition to discuss why some parents are choosing to share their wealth with their adult children during their lifetime rather than waiting to pass it on as an inheritance.
Megan explored the financial and tax considerations families should weigh when making these decisions, including how thoughtful gifting can fit into a broader estate and financial plan.
Listen to the full conversation on WVXU’s Cincinnati Edition here
Don't want to listen to the audio? Here’s the transcript you can read instead:
Lucy May, Host: Are you building your wealth with plans to leave it to your children or grandchildren? Your will. Have you thought about giving them your money now instead? You're tuned to Cincinnati Edition on WVXU. I'm Lucy May. Joining me now to discuss when to give and the factors to consider are Foster and Motley financial planner Megan Lyons and DARPA elder law partner Chad Sider. Thank you both for being here.
Chad Sider, Guest: Thanks for having us
Lucy May, Host: In the spirit of full disclosure, I want to say Chad helped me and my sister with my mom's estate after she passed away. So thank you for your help and appreciate seeing you again.
Chad Sider, Guest: You're a great client.
Lucy May, Host: And a note to our listeners: This conversation is meant to be general in nature and should not replace advice from your financial advisor or your attorney. So the late Carl Lindner Jr. used to say, "I like to do my giving while I'm living, so I'm knowing where it's going." And I was thinking about him as I prepared for this. Megan, are you seeing a growing number of your clients kind of take that approach?
Megan Lyons, Guest: Absolutely. Some of the listeners may have heard of the book "Die with Zero." It's been a big hot topic recently, and I have many clients come in the doors saying, "Have you heard this book? Let's talk about it." I think there is a growing awareness to your point that there's a great chance you die with more than you retired with, and why would you want to do that if you know your kids, your grandkids, especially in today's economy, might be struggling a little more than you were to buy the house or, you know, take care of their pertinent financial needs? So it is absolutely a growing topic of interest that we are spending a lot of our client relationship time talking about.
Lucy May, Host: Yeah. What about you, Chad? Are you having more clients ask about that or talk about that?
Chad Sider, Guest: Increasingly so. I think it's an important part of any estate planning is figuring out what kind of gifts and how much you want to give during your lifetime, and, you know, the cold hand and the warm hand, you know, that kind of analogy, as far as applying what plan you want to affect in your life, as opposed to just seeing that all works out in the end.
Lucy May, Host: Yeah, yeah. Well, Megan, what do older adults need to consider before deciding whether to give away their wealth before they die? I mean, it seems like it's really important to make sure they have enough money to take care of themselves first. I have to say that idea of dying with zero—that's a pretty fine line to walk, isn't it?
Megan Lyons, Guest: Yeah. If I had to be honest, I don't often recommend that they die with officially zero. That would be a big risk. But I do think that, you know, if you have taken care of not just your, let's call it, your basic financial needs plus probably a lot of planning around healthcare expenses because that's going to be one of the greatest costs for most people in the latter end of their life and then you still have a little buffer from there, if you can determine what that number is, which is exactly what we're doing as a financial planner. That is the perfect moment to then say, "All right, I feel like we've got buffer, we've got our base, we've got some intermediate expenses. What now could I be doing to help my kids?" And that's definitely the approach we take. You're taking care of now. Let's talk about the rest of your goals because most people do have the goal of caring for their family in some capacity.
Lucy May, Host: Chad, how tough is that in terms of the medical side of things? I know you talk to people about Medicaid and working through those systems. I mean, that can be tough to predict, can it?
Chad Sider, Guest: Very tough to predict. I often tell my clients, "I wish I had a crystal ball so I could tell you exactly what to do," and that is, I think, the biggest obstacle when figuring all this out is the long-term care expenses are exorbitant. I mean, the new numbers came out last month in Northern Kentucky. The typical long-term care facility is around $500 a day. That'll burn a hole in most pockets pretty quickly. And so, you know, Medicaid planning, particularly the concept of the five-year lookback, is crucial for people to understand. Particularly, I mean, even if you are solidly upper middle class, $500 a day, you know, that is especially if there's a long-term stay, that will really be, you know, a terrible expense if you did not plan for it. So, as far as the five-year lookback, I frequently go to the Medicaid office, and among the first questions asked by Medicaid caseworkers: Have there been any transfers of resources for less than fair market value, or gifts made within 60 months, five years of this Medicaid application date? And they are looking. They—the caseworkers—have the right to audit five years of your financial transactions, and, you know, it's an expensive program to run. So they're looking for any reason to give a penalty, and that's what happens if there have been transfers for less than fair market value or gifts made: there is a penalty assessed, which means that's a period of time where the person in need of long-term care who is at a long-term care facility cannot receive Medicaid benefits, and so they're now having to pay privately. Which, you know, you know the numbers now, so it's a pretty big thing that people often overlook. So, as much as I love the idea of people giving their money away, that is a huge factor that I think really should be considered.
Lucy May, Host: Yeah, well, we're talking about when and whether it makes sense to give your money to younger relatives now rather than waiting to leave it to them in your will. What do you think? Give us a call at 513-419-7100, or you can email talk at wvxu.org. So Megan, can you give us any general tips for how to calculate that? How do you make those calculations and figure out what really makes sense?
Megan Lyons, Guest: Yeah, well, there's a simple and a complex way of doing it. Obviously, at a very high level, if you know what your monthly or annual expenses are, you know that's a very pertinent number, and then you got to know what your assets are. Where are you getting the money from? Obviously, Social Security is a huge portion of people's living situation. But there's also likely some kind of assets, old retirement plans, etc. You need to have a sense of, you know, after I get my Social Security or pension, how much am I pulling from my retirement portfolio on a monthly or annual basis? Most financial planners will take that and extrapolate it out a lot. We'll add some growth rates to assume some things around what you might expect to earn on your portfolio. We'll add in some inflation on your expenses to make sure we're keeping in mind that inflation eats away at people's portfolios. And then once you kind of run those two numbers, and we know that markets go up and markets go down, and that's going to be a pertinent idea as well. We then would want to start thinking about on the tax front, inheritance and estate tax. Make sure that there's no risk that you are going to be, you know, sanctioned by one of these things. That you are not going to come up against inheritance tax in certain states or estate tax at a federal or state level. I would say most people are not because the exclusion limit is so high. But that would be the next big question, and we can plan for thoughtful ways with the help of an estate planning attorney on how to transfer wealth to your children. But from then on, if you kind of know what your retirement plan looks like, you know what you're roughly going to need to spend. We can give you some guides on what to expect for long-term care health event. Excuse me, long-term care health event. Then you can start to have thoughts with, you know, your spouse or whomever saying, okay, we've got three kids, and we know that it is likely that we are going to pass with a good chunk of money at the end. What is the most thoughtful way for us to start doling this out, either currently or leaving it for them upon our passing, and everyone's going to have a different balance to strike there on how much they want to give currently versus how much to live with their passing.
Lucy May, Host: Well, Chad, what can it mean for children and even grandchildren to get that money from the warm hand, as you said, to get that money before their parents or grandparents die, can it make a bigger difference in someone's life if they get it when they're younger?
Chad Sider, Guest: Oh, I definitely think so, particularly because of the cost of living expenses. I mean, we all hear the arguments. You know, it's easy to blame the boomers for everything. You know, God love them, but as far as receiving money from your parents or grandparents, that money is not taxed. That is, if there's any tax implications, always on the giver, not the recipient. So always check with a CPA if you're you have concerns, of course, or your tax advisor. But it definitely can be helpful. But I do think the, you know, going back not just to the five-year lookback, but just age considerations too. You know, when somebody gives away, when a parent or a grandparent gives money to a child or a grandchild, you do need to think about how frequently am I going to be giving? Is this a one-time thing? Is it going to be multiple years of doing this? That there's a lot of tax preparation, especially if you're going to be exceeding the $19,000 gift tax threshold, where, you know, if you exceed a $19,000 gift, there is a reporting requirement with the IRS.
Lucy May, Host: Is that total or per year or what's that $19,000 per year?
Chad Sider, Guest: You remember the old Oprah meme? You get a car, you get a car, everybody gets a car. That whatever, however that goes, that same effect, same kind of principle here. You can give $19,000 to as many people as you like, but if you give another dollar beyond that, $19,001, that does trigger a reporting requirement. That $1 goes against your lifetime gift tax exemption of $15 million.
Lucy May, Host: Wow, it is complicated. So, Megan, from the recipient's perspective, if you are a young person and you're getting this money, however much it is from a parent or grandparent or whatever, what should they consider in terms of the most strategic way to use the money, so they don't just blow it on something?
Megan Lyons, Guest: Great question. Since I'm often working with the parents and not necessarily directly the children, first I start with the parents and say, what potentially hole are you looking to fill, or what addition are you looking to add to your child's life? So, in some cases, tying the gift to a really specific life event is always helpful. They want to buy a house. Well, houses have almost, you know, doubled in price, I believe, regionally over the past 10 years. Maybe it makes sense to do a down payment gift. Maybe not leaving the whole down payment, but a chunk of it. What a useful way to give them a bit of a leg up that is not letting them blow money on anything. So we start with the parent around, you know, what is your hopeful goal here? Knowing that if you turn over the money, it is at that point your child's money. On the other end, we also offer to always talk to the child and say, okay, you're getting X Y Z gifts from mom, dad, grandma, or grandpa. Why don't we scoot some of this potentially into, let's say, your Roth IRA contribution for the year, or should we put it in the market, or are you going to apply it to a car purchase or loan repayment? There's so many different ways that are really great fundamental first steps in somebody's financial journey that makes a big difference down the road if they have a little excess cash, you know, even less than 19,000. You know, a 10,000 gift in a year can be really critical to some people in their early stages of life. So it's a little mix of balancing mom and dad's desires for the money and seeing if we should tie it to a specific rhythm of giving to the prior point, or if it should be a recurring or one-off, and make sure that the child understands like what does this mean for the change to my monthly budget and financial obligations.
Lucy May, Host: Yeah. What about opening a 529 plan or a 529 plan? Is that a good strategy?
Megan Lyons, Guest: That is a good strategy. I would say the kind of gifting we're discussing, it is—how would I say? I would say it's a little different. It is still a very good choice for a lot of these children. They're adults most likely. Yeah. So the 529 might be for their children. So therefore, the grandchildren, still a great thing. But I think you would want to have a conversation with your child to say, do you have a sense of what you might want to be providing for said grandchild for educational costs because the educational landscape has also changed a lot in the last 10, 20 years.
Lucy May, Host: Yeah, and hard to know how it's going to change in the next 20 years. Exactly that crystal ball that Chad was talking about. So, Chad, what is the federal law related to estate taxes now? And I know different states have different inheritance laws. Can you talk to us about that?
Chad Sider, Guest: So, at a federal level, which, you know, the federal government, it does not apply to most people. I mean, there's a $15 million threshold for individuals, and then there's a third—
Lucy May, Host: I will say I'm not going to make that.
Chad Sider, Guest: Yeah, so, and then there's a $30 million threshold for a married couple. I mean, kind of simplifying the rules here. And then there's a roughly 40% tax rate on the excess. So you can do the math there. But there is what's called the annual gift tax exclusion, where I was the $19,000 number I was mentioning before, and again, you can double that, kind of simplifying the rules here. If you're married, giving money, so $38,000. But the $19,000, the gift in excess of that is something that has to be reported to the IRS when you file your taxes every April 15. So that is the federal landscape in a nutshell. It's obviously a little bit more complicated than that, but just so people have an idea. And then as far as the states, Kentucky does have an inheritance tax. Ohio and Indiana have both repealed theirs. In Kentucky, though, for most folks, in fact, they just changed the rules in Kentucky to include nieces and nephews of the blood, but as far as, you know, leaving money to your spouse, your children, or grandchildren, siblings in Kentucky, that it's inheritance tax free. Those are considered Class A beneficiaries. It's where really when you give more money to more distant relations and to friends, that's when you're seeing the Kentucky inheritance tax.
Lucy May, Host: Okay, we got a call from George who couldn't stay on the line, but George asks, "What are the implications of giving a gift of equity if your children are purchasing your home?" Is that something you've looked into, Megan?
Megan Lyons, Guest: Yes, and I'm gonna always preface this with, I'm not a CPA, but it's going to be determined by the fair market value. So if your house is worth $500,000, but you give it to your child, and I shouldn't say give, but you sell it to your child at a discount, let's say $250,000 or $300,000, that difference would be considered a gift and would need to be calculated into everything because you would be saying to them, hey, I'm giving you a really good sale price on this. It's a little more complicated than I just said, but you would need to consider that in giving whether it's a house or even stocks and bonds potentially.
Lucy May, Host: Is that something you talk with your clients about too, Chad?
Chad Sider, Guest: Yes, the concept of cost basis. I mean, it's a simple concept. I mean, most people understand it. I mean, if you bought a stock 30 years ago or a house, you know, 50 years ago, I love these families that I see. You know, mom and dad bought a house in the early 70s for 50 grand, and now it's worth 400. And should we add our kids to the deed? You know, they'll ask me, and I said, no, probably not. Probably not a good idea because when the kids go to sell it, they will adopt, you know, at a percentage level, the basis—what mom and dad bought it for—when they go to sell the property eventually, whereas there is a step-up in basis upon the death of the owner. So it is usually, you know, always consult a CPA. But nine times out of 10, in my experience, it is best to have somebody die owning property for a full step-up in basis. So, if that $50,000 house is now worth $400,000, when the kids go to sell that house out of the estate, the house is worth $400,000. So they're not paying capital gains on it, as opposed to the $50,000 basis, they would be paying a considerable gains rate.
Lucy May, Host: Wow, so much to consider. Well, Megan, you talked about some of the other ways people can think about transferring wealth to younger people if they decide to do that while they're alive, but you don't want to give somebody cash. You know, like you were saying, what do you know, if you got to decide what hole you're trying to fill. You mentioned down payment assistance, but what are some of the other approaches that really make sense?
Megan Lyons, Guest: Oh, there's a lot of options out there. You know, I think a common one that we start with when people are interested in giving to their kids, but potentially to the prior point about age, maybe they're in their late 50s, and I'm still looking at the duration of their plan, saying, "Hey, I think you're going to be fine, but let's not get too aggressive with this until we have a little more sense of how the next couple years goes." Something I'll say is, "Why don't we make the Roth contribution for your kids?" And people usually go, "Oh, I hadn't thought of that," because Roth dollars are after-tax dollars. They grow tax-free in duration. So if you are able to give or fund your child's $7,500 Roth contribution at age 25, what a gift—that's going to grow tax-free for the next hypothetically 35-40 years until they might need to access those funds, and $7,500 to a lot of people in their 50s, 60s, 70s maybe doesn't sound like a really large amount of money. But I can tell you, when I was in those shoes, you know, a decade or more ago, I had to kind of pinch pennies to figure out how to come up with the cash to then contribute to my Roth at that time. So you can start small with something as small as each child is going to get $7,500, and we're going to make the Roth contribution on your behalf. Most financial planners will help facilitate this, so it shouldn't be too hard, and that starts a nice clock for them. So that's a good idea. Obviously, house down payment, but even to some extent, a family loan. It doesn't sound like a gift to many people, but if you're willing to give your child a preferable rate, right now I think the latest rate I saw out is 6.5%. You know, I know that there are people in the 80s who are paying 15, 16%, but for those of us who maybe bought at 2.75% this feels heavy and high. And so, if you are able to do what's the highest applicable federal rate, which is, I don't know, for long term, maybe it's 4.5%, and you can reduce that rate that your child has to pay on that loan. That's a huge gift to them. So always there's going to be maybe implications on the tax that, you know, might be quote-unquote due, and that gets complicated. And you should talk to an estate planning attorney and a CPA. But those are just small ways where small dollars can make a big impact.
Chad Sider, Guest: I agree.
Lucy May, Host: Well, Chad, we're running out of time, but what is the best way to approach a discussion about this? I mean, if you're a younger relative, you don't want to go to your mom or grandma and say, "Hey, if you're leaving me anything in your will, I could really use it now." It seems kind of ghoulish. Like, how do you start talking about this?
Chad Sider, Guest: I think it's important just to have exploratory conversations, not have a particular goal in mind. You know, I'm going to try to get grandma for all she's worth. That's not a good approach, I found, but just to say, you know, what's—talk about long-term care. No one, no one wants to go to a nursing home. I mean, most people are wheeled in, sort of involuntarily, or out of necessity. Do we have a plan in place in case that happens, Grandma or Mom and Dad? And those sort of things, those sort of conversations about their future, then lead to more comprehensive conversations, and that's when conversations about maybe life transfers, transfers during the life of somebody in the family make more sense. But I think it's important to discuss these things in context of a bigger plan for the person who has the money.
Lucy May, Host: Sounds like good advice. I have been talking with Foster and Motley financial planner Megan Lyons and Darfel Elder Law Partner Chad Sider. Thank you both so much for your time today.
Megan Lyons & Chad Sider, Guests: Thank you.
Lucy May, Host: You've been listening to Cincinnati Edition on WVXU. Our producer is Selena Reder. Associate producer is Harper Carleton. Technical director today is Ella Rowan. If you miss our program live, you can find Cincinnati Edition wherever you get your podcasts. I'm Lucy May. Thanks so much for listening.