Will your children be too wealthy?

JANUARY 10, 2014

 

A couple I know used to spend their time on long car trips imagining they won the lottery.  They would seriously discuss the right amount of money to leave to their children and then decide where to leave the rest.  Once they had figured out how much to leave their children, they would pick charities to receive the rest of their hypothetical wealth and then assign percentages to each of the charities.

 

The couple were my parents, and they never did win the lottery.  However, I sometimes indulge in the same exercise while I am stuck in the car or on an endless line.  Nothing in my financial statement suggests that I will leave my children too much money, but I have known “trust fund babies.”   Many of them are not productive, and surprisingly, many of them are unhappy.

 

If you are fortunate enough to have millions to leave to your family (whether in securities or in land or in any other asset), you might want to think about your own favorite charities.  Can you leave them a small percentage of your wealth or a discrete sum of money without depriving your family? Even if you can, why might you want to?

 

A charitable bequest is a way to thank the charitable organization for services provided to you or your community or to a broader group. It is a way to encourage your children to appreciate the value of giving back. It is also a way to perpetuate the values that are important to you. For many charities, any amount will probably be meaningful.  In fact, a charitable organization may appreciate the funds more than your children do.

 

A charity will even appreciate the illiquid asset that your children don’t have the time or energy to sell.  You can leave a charity part of your retirement account, and save your children the burden of paying income tax on it.  If you make a charitable gift by naming a charitable organization as a beneficiary of your IRA or similar asset, the tax-exempt charity will not have to pay income tax on what it gets.

 

That means that the IRS will pay for a significant percentage of the IRA funds you designate to charity.  If your children got those funds, they would be subject to both state and federal income tax. And your children would need to pay that tax several months after they accessed and spent the IRA money.  If you name a charitable organization to take part of the IRA, you can make a dramatic statement of support for your charity and reduce your children’s income tax bill in the bargain.

 

If you want to benefit your favorite charity, you need to make sure you take steps to make sure that happens.  If you have a Will, you can leave a charitable bequest.  If you don’t have a Will, there is no way to direct money from your estate to charity.  You can tell your family about your wish to benefit your charity of choice, but without a Will, you cannot make them do it.

 

Many people choose to make charitable bequests if they don’t have children.  If you are single and childless and don’t have a Will, your wealth will pass to your parents (if living) or to your siblings.  If you are an only child, your wealth will go to aunts, uncles and cousins if your parents predecease you. For some people, that is just what they want to happen.  For others, it is the last thing they want.  If you would rather benefit a charity than your obnoxious sister or your lazy brother, you should certainly make a Will and name your favorite charities.

 

You can also name your charity as a beneficiary of retirement dollars or a partial beneficiary of your life insurance.  One advantage to that is that you don’t have to change your Will if your charitable intentions change over time.  In many cases, all you need to do is download, complete and mail a new beneficiary designation form with a new charitable recipient.

 

Congress likes charities.  As a result, there are lots of fancy tax-saving things you can do if you want to include a charity in your estate planning.  You can let your spouse or children have some access to the assets marked for charity during the period between your death and theirs.  Or you can give a charity access to an asset and then pull the asset back later to serve as a retirement fund for your children. 

 

These complex transactions are beyond the scope of this article.  They were way too complex for my parents on their car trip.  But my parents’ interest in giving back and in identifying with chosen charities has resonated with me.  I hope it resonates with you.