Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

How Do We Build Multi-Generational Wealth? [Estate Planning]

July 22, 2024 • Ari Taublieb, CFP®, MBA • Episode 190

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You don't want to be at your child's wedding wondering if you gave them too much where you now may be a future burden in retirement. You also likely don't want to be thinking about passing away with $10M+ when you could have helped children along the way.

I discuss all the strategies involved in estate planning: charitable giving, donor-advised funds, charitable trusts, etc.

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

Today's episode is all about multi-generational wealth and it is brought to you by my clients who asked me to talk about it. And my clients know who they are because the episode is coming out and I sent it to them right when it did. And they go. Yes, I'm excited everyone else gets to hear this. So the quick story I told these very lovely clients they're in their 40s and they're on track for a lot of money. They're doing really well and they're wondering, hey, should we start giving to our children now? Should we wait, because we don't want to run the risk of running out? We know they have time to make more money, but we just don't know what should we do? How much can we gift? How do we think through that? And I said I don't want you sitting at your kid's wedding and their child is nowhere near getting married, but I don't want them sitting at their kid's wedding going, hey, did I just give them way too much money where now we might be a burden to them in the future? Did I not give enough money where I'm on track for millions? And if I would have just given them $15,000 more, they could have had the day of their life Like how do I know how much I can give effectively and how do I think through that? So they were like I definitely don't want that to be me. So we went through a big exercise and I showed them what they're on track for and not on track for, and it wasn't a number that they loved because they wanted to be able to give a lot for a wedding. But when it comes to retirement planning, I said I want you to be able to understand retirement planning is not just are we on track for retirement, it's also a cashflow decision. So even if you're on track to retire early in your fifties, I might recommend continuing to work. If we have a kid in college or if there's some big upcoming expenses, we're doing a remodel or something like that Not because I mean, but because what you don't want to do is get unlucky and you don't want to retire too early. And now we've got healthcare costs, we want to travel because you have your energy and your health, we're paying for kids, stuff we've got, and then you just run the risk of not actually being able to spend what you want the rest of your life. So they understood that. But this was going to be a deeper conversation on giving and really building multi-generational wealth.

Speaker 1:

Now, some of you have read the book Die With Zero and you're like, hey, should I even listen to this podcast? Maybe. But I will say it's not going to be as applicable to those of you that have children or are wondering about how much you should potentially do uh, charitably Give, if that's of importance to you. So I was thinking for the words there. I'm like I feel like there's a better term. I was thinking of tithing. So it depends what you are hoping to accomplish. Some of you are like, listen, I work so hard for this, I want to die with zero. If there's $100 there, I'm going to be pissed. Others of you are like listen, and most of you I'll say, you're not trying to die with exactly zero. You want to make sure you definitely do not run the risk of running out, but you don't want to look back going okay, I've got 10 million bucks. Why didn't I spend more or give more or help more when I was in a fine spot to do so? So I'm going to go through how to think through this today.

Speaker 1:

If you don't already know, my name is Ari Taublieb. I'm a certified financial planner. I am the host of the Early Retirement Podcast and I'm the vice president at Root. If it feels like I'm doing a few more pauses than usual, I'm a little under the weather, but I put out a podcast every week and I'm not going to miss it. So sorry if you feel a few more pauses today, but you're getting the authentic content. I do not edit really any of this. So what I'm going to do now is I want to bring up a few things that I made some notes on when I was having this conversation, and this is the way I approach it with clients. So right now, if you're listening on the podcast app, of course, keep listening. If you're watching on YouTube, you're going to, of course, be able to see me go through this. So not better or worse. Wherever you're listening, feel free to keep listening, but try to give both of you the content you're looking for.

Speaker 1:

So whenever I'm doing planning, I start with what's the goal in terms of let's assume you have a billion dollars, what would you do differently? Most people don't change life drastically, but they go. You know what? I had one client that's like I would buy more pressed juice. I'm like what they go. Yeah, I like juice and green juice, and I hate having to clean this thing. So that's what I would do. I having to clean this thing, so that's what I would do. I'm like. You answered that very quickly. I think we could make that happen. If this is what you're on track for, they're like okay, good to know Other people go. Listen, not just the juice.

Speaker 1:

I want to make sure I can help my grandkids go to college, but you know, I don't want to give them so much that now they're like not going to work hard. I want to have them you know them still to have an investment. And what if they get a scholarship? Did I just like throw away too much money? So before you go into the financial side, ask yourself, okay, what are the goals? And so if we're paying for grandkids, for example, if you leave them $50,000, they might just go buy a new car. So are we going to be efficient as to what account we use, whether it's 529s or UTMAs or stuff like that? You might want to consider a college fund specifically.

Speaker 1:

So, leaving money for grandkids, the questions when someone says I want to leave money to my grandkids, I don't let them leave it at that. It's like when someone says I'll go and say, hey, what's your estate plan? And someone says I have a trust, I have a will, I go. That's cool, what's your estate plan? They're like I just told you I go. No, you just told me a bunch of documents. What's your plan to not be 75, with $10 million wishing you spent more when you had your energy or your health? They're like huh, I go. What's your plan to effectively give to children? While it's maybe more valuable, they go huh, I go.

Speaker 1:

Estate planning goes deeper than do we have a trust or a will. So if someone's thinking about, yeah, I want to leave money to grandkids, or you're thinking that might be something you want to do one day, are they old enough to manage the money effectively or will they be Now? Of course, none of us know when we might pass away, but these are things to think through. If they're three years old, do you want to leave the money outright? Are we considering a UTMA account or a trust account? Potentially, I have a few clients that have a generation skipping trust. There are some potential estate tax concerns.

Speaker 1:

So these are what we want to think about in terms of other giving. Is it paying off your kid's mortgage. Are you writing a check to them? Don't just wire them money. Do you want to make it tough for them? You want to understand how much barrier in financial planning do you want to include?

Speaker 1:

Some people go yeah, I want to just help my kid out to the umpteenth degree and that's why I'm on earth and if I'm okay, I'm good. Other people go no, I want to help them out, but I want them to get this amount this year and then this amount next year, and I just know they wouldn't be responsible. Some people go you know I have five kids. One of them would be responsible, four of them wouldn't. So that's where you want to desire to see this gift, whatever you're thinking about, made while you're alive. And most people go yeah, and I'll give this example.

Speaker 1:

I have a client that bought Apple stock and it was for about $12,000 and it's now worth north of $100,000. And so people are like, okay, what should I do? How do I think through this? And not just people, many clients in this particular client. They have a really scary health event, unfortunately, and they're like you know, should I give that Apple stock to? You know my kid and you know they'll kind of learn about investing. I go, you could, but it might be better to not do any of that. And they're like, why not? And I said well, if you gift it, the cost basis is going to transfer so that 12,000 you purchased it for. Good job for you. It went up. But if you give it to them it's going to be as if they bought it for 12,000. So if it keeps growing, they're going to have to pay taxes when they eventually sell the position.

Speaker 1:

So what you might want to do is not give that, potentially give from somewhere else, because that's money that's going to get stepped up. And some of you are like what do you mean stepped up? Well, stepped up means, if God forbid, something happens when that child inherits the money, if they're the beneficiary on a brokerage account, the money gets stepped up. It's as if the child bought it for what it's worth today. So you're like, wait a second, I bought it for $12,000. It's now worth north of $100,000. And I and I could potentially not give it. But if, when I pass away, it could go to my child and it would be as if they bought it for north of 100,000, I go yes, that's exactly how it works. So hopefully that just clicked right there. Now, if they don't do that, the child's gonna receive it and they're gonna have to diversify and there's capital gains and you're probably not ending up with a whole lot more.

Speaker 1:

Let me give you an example. A client do this. Before they came to me, the child was in California. 20% was the federal capital gains bracket, because they were making a healthy income. 11.3% was the state tax and 3.8% net investment income tax. So if they went and sold and let's assume there was a 90 or 95 or $100,000 gain, let's just assume there's a $95,000 gain. To keep it easy, you bought it for 5,000 and went to a hundred thousand. You are ending up, after taxes, with about 66,750, meaning you as the child. So if they would have just passed away and let that go to their heir, they wouldn't have had to pay any taxes on that. So that's number one. Number two um, and I'll do this with clients.

Speaker 1:

Not fun exercise, but something to think about. Assume you only had one week or one month to live. What would change differently in your estate plan? Well, if you knew that, god forbid, something's going to happen to you, you might go yep, I have a month left to live, I'm not going to gift Apple stock to my child, but a lot of people go well, what if I live 20 years? Am I not going to give this one position that, yeah, they'd have to pay taxes on it, but they would still get more money today and it would be helpful? So it's not me saying don't do it. It's me saying think about it deeper. Hey, what do you care about most? Is it tax efficiency? Is it seeing that money used to bless kids and grandkids and those that you live? If you have a month to live, how would that change things? And then, of course, what if you have 10, 15, 20 years left? So that's what I would start thinking about.

Speaker 1:

And I take it a step further. Ok, let's really understand the tax implications, because if you have an IRA or a Roth IRA, that's very different from a brokerage account. If you pass away, there's a lot of different rules and things you have to think through. The first one I want you to know when it comes to tax implications is the step up in basis that I just told you. The second one is called an estate tax exemption. So for a married couple, it's $27.2 million.

Speaker 1:

Now this is changing, okay, but if you're individual 13.6, the important thing, think about that like a bar tab. Okay, so you could essentially give 12 million out of your 13.6 million and you're never gonna have to pay taxes on that. That's an exclusion. It's like you're going and you're buying. That'd be a lot of drinks, obviously, but you're going to go out. I just use the bar tab analogy because it works for people, because it's a confusing concept. It's like so do I get $13 million? No, it's $13.6 million. You don't have to worry about estate taxes from anything beyond that you would.

Speaker 1:

And so if you pass away and you've got significant tax implications and your net worth is way north of that, yeah, there's some deep planning. Most of you won't be in that boat, not because you couldn't be, but because you don't want to die with that amount of money. And so what you want to start considering is hey, should we and even if you're not on track for that should we potentially give $18,000, which is the most you can give right now per person for each recipient? So I could give $18,000 to my hypothetical child and my partner, alice could give $18,000 to our hypothetical child, so that child's receiving $36,000. Now, let's assume we have 10 kids. I could personally give $18,000 to each of those children. So I could give $180,000 and my partner, alice, could give $180,000. So we gave $360,000. That's an option. Now there's no tax implications. You don't have to report anything. If you give above that, now you have to start reporting it. That goes against your bar tab. You can still do it, you can still give them money and you won't have to worry about the taxes. But they have to know about it. So it's $18,000 to just totally not worry at all.

Speaker 1:

What is important is using proper beneficiary designations, because it's rare I see this be an issue, but sometimes it is. So to keep it easy, let's assume you have $500,000 in an IRA and $500,000 in a brokerage account and let's assume I just wrote out an example here your son is 50% beneficiary and the charity is 50% beneficiary. Now let's assume your son is in the 40% bracket because they're a physician and they've got a healthy income and they're killing it. Well, what you want to do is be strategic. You want to leave potentially half of the IRA to him and half to the trust. Like, let's just assume hypothetically you're doing that. Well, he would inherit $250,000 in an IRA and then he would end up with $150,000.

Speaker 1:

You're like what do you mean? Well, what you don't want to do is give half to the IRA and half of the brokerage. You don't want to give half and half equally to your son and to the the charity, because that's not tax efficient. The charity doesn't have to worry about taxes, the son does have to worry about taxes, so you don't want to just look at it evenly. That's the equivalent of saying I'm going to go ahead and invest the same in my IRA versus my Roth versus my brokerage. The brokerage you might want to live off of earlier, so it should probably be more conservative. The Roth you're not going to touch for a while, so it should probably be a whole lot more aggressive. Same thing here If you left half of the IRA to him, he's going to inherit half of 500 or 250, pay a lot in taxes, end up with 150,000.

Speaker 1:

So what you want to do is be intentional. The charity what if you give the charity the full $500,000 and then you give son the full $500,000 from the brokerage account? Well, the brokerage account would get a full step up in basis. So your son inherits the full $500,000 and the charity receives $500,000 from the IRA and they didn't pay any taxes. So you essentially gave a million dollars and didn't pay taxes. You just did it effectively versus saying let's do, kind of, half of the IRA to my son. He pays taxes half of the brokerage account. It's just not efficient there. So you really want to dial this in because you want to leave generally more of your brokerage assets to children because of the step up in basis.

Speaker 1:

And then, finally, what's the time horizon of all this stuff? What you don't want to do and these are the mistakes I've seen people make is go. Yeah, I'm going to give this rental property to my child and they give it to them and they go. It's an investment, but it's really not an investment. They're just, yes, it's an investment, meaning it could go up in value, but the child's using it for income and it's really not helping them out in retirement. I've seen someone over a gift to a child where now they're not on track. So you don't want to do that, but you want to make sure you're thinking through. Okay, the point in life is not to die with the most amount of money. How much can I maybe give to help out those that are important to me? So what's the right allocation? How do I think through this, all of that?

Speaker 1:

I would even argue asking the question what if you and this is once again taking it a step further, maybe even unnecessary, but I just wanna put it out there what if you knew you were gonna pass away with $10 million right now? Would you give it to charity? Would you potentially consider giving it now to children? Are there other people you'd wanna help out? Because I have a client that is on track to pass away with a lot of money and they're really worried about the taxes. And I said I want you to do it anyway and they're like why I go? Well, you're on track to certainly pass away with a lot of money. Yes, you're gonna have to pay taxes, but they're gonna essentially see, you're gonna get to see the value of what you're doing.

Speaker 1:

And I don't want you to make the mistake of declining a very amazing moment. Not very amazing. That's like when someone's like we have a very full flight today. It's like that's impossible. It's either full or not full. But I want to make sure that if you're thinking through this right now for yourself, kind of close your eyes unless you're driving and going. Okay, great, am I making the mistake of almost declining a bonus because I'd have to pay taxes? Because that's what this person is doing. This person is going well, I don't want to give today, I'm going to have to pay taxes and I could save so much more. I go, that's true. So it's not a perfect analogy, but I have people that are like, hey, maybe I don't take this bonus or this because it's going to pay me more. I go, maybe don't take it if the responsibility is more and it's more time and effort and energy on your part. That I understand, but don't decline it because you going to pay more taxes, because it's still a net positive to you. In this example it's not a net positive, but you're going to actually get to see the value of the work you're doing Now. Sometimes it is a net positive if you're being really strategic as to how you're giving and what this looks like. So this is what I wanted to go over in today's episode.

Speaker 1:

I'm going to leave you with one last example, because this is one of the most common tools that I'll use for my clients when I am doing charitable giving, and this is specifically on the charitable aspect. So some of you have heard of a donor advised fund before, but you've maybe never explained it in a way that it made sense for you. So I'm going to do that for you, hopefully right now. So let's assume you give $5,000 every single year to the Red Cross and you take the standard deduction every year. You're being a very nice person to do it. I like that, you're doing it, but you're not really getting a tax benefit for doing it. You're just given $5,000. Now let's assume you bought Apple stock for 5,000 and now it's worth 50,000. So there's a $45,000 gain.

Speaker 1:

You could and when I say you, I'm just gonna use me an example I could give that Apple stock position that went, bought it for five, went to 50. I could give that to the Taublee giving foundation. Like, why would you do that? I want to do that because I'm going to get a big tax deduction in one year, so the government goes already. Kudos to you. You can't just give that to children or friends or family. It's only going to charities, but look how much it's going to save you this year.

Speaker 1:

So it could be really helpful if you have a high income year or if you're doing a Roth conversion where your income is going to get. You might want to use a tactic like this to decrease your income, especially if you're already doing charitable giving. Now you're like, ok, what about the $5,000? Oh, I can still give $5,000 out of the Talbot Giving Foundation. I was just effective as to how I did this, so you're probably wondering why would someone do this? Well, let's assume I bought Apple stock for $5,000 and I sold it at $50,000. I'm going to have to pay taxes, so, and I sold it at $50,000, I'm going to have to pay taxes. So maybe now I'm only ending up with $40,000. And if I give $5,000 every year, that's not going to let me give and help the charity as much, because they only got $5,000 a year until $40,000 was essentially depleted, versus $5,000 until $50,000. They got 10 more years as opposed to way fewer years, and whether it's $35,000 or 30,000, same example applies. I wanna make sure that if you're thinking about doing a Roth conversion or you're in a really high income year, that you have the ability to go. Wait a second. Maybe I should consider this approach. I'm already doing charitable giving, I'm just not getting a tax benefit for it. Sometimes it can make a lot of sense and that's the first value, so hopefully that resonated.

Speaker 1:

The next value of doing this approach is people go all of a sudden. My kid's asking about charitable giving or my spouse has never been involved in finances, and this is a wonderful tool that gets family involved, because now, as a family, you're making a decision. You have the Taublead Giving Foundation. We've got $5,000. Hey, everyone, how do we want to distribute it? Is it $1,000 here, $1,000 there, is it $3,000 there and $2,000 there? Now the child starts to go. Wait a second, why did you even do this? You explain the tax benefit. Oh, that's interesting. Hey, I heard my friend talk about a Roth IRA. Now, all of a sudden, your child or your spouse is more involved, naturally, in finances because they see the power of planning. No spouse generally.

Speaker 1:

I imagine you're listening to this because this is more intriguing to you versus your partner, because that's what I hear most of the time. No one wakes up and goes yeah, let me talk about Roth conversions, but they do want to travel in retirement, they don't want to run the risk of running out, they want to be able to give to those they care about. And so, if you can almost shift the conversation to hey, we do all these strategies so that we can do this stuff. People get more involved.

Speaker 1:

So if this episode was helpful, please leave a review, let me know, send me an email, drop a comment on YouTube. This is why I love doing it. So if you want a holistic approach designed for an early retirement, it's what we love to do. If you want the academy, which is where I walk you through the different videos and show you how much you are on track and how much it'll tell you you can gift effectively and all of that, but you want to run it on your own, you're more than welcome to do that. So both options for you in the description of this episode. That's all I got for you guys. See you next week.

Speaker 1:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.