Firstly, I want to say that I appreciate Casey’s trust in allowing me to pass along my thoughts on the topic of generational planning to his client base. Much like Casey’s successful tax practice, our wealth management firm credits a large degree of our success to the trust our clients have placed in us over 4 decades.
Similarly, when my clients begin to address generational wealth planning for their families, the word “trust” also comes to mind. They have to trust that their children will handle their wealth responsibly. They have to trust their surviving spouse will continue to give to their favorite charities when they pass. Ultimately, they have to trust that their family will respect the legacy they’ve left behind and work to pass it along to the next generation(s).
From a numbers perspective, most wealthy families think that they no longer have to worry about passing along their wealth to the government in the form of the estate tax now that the federal exemption limit is approximately $15 million per person. However, here in the great state of Illinois, there is still a state exemption limit of $4 million per person. This has a lot of families in Illinois (who don’t want to change residency) with $10-$20 million in assets asking themselves what they can do to avoid paying a state estate tax when they pass. To that end, I thought it would be helpful to share nine strategies that can help your family get a jump start on your generational wealth planning.
Tip #1: Make Sure Your Accountant, Attorney, and Financial Advisor Work Together
Great generational planning covers several important disciplines (tax, investment, insurance, estate planning, etc.). I’ve found that the key as an advisor is not to try and do everything yourself, but rather to coordinate closely with other professionals like Casey to ensure that each strategy is understood, communicated, and implemented to each of the proper professionals.
I’ll give you some examples of where poor coordination affects an individual’s generational planning:
- A client calls their advisor for $100k they need to gift to their child to buy their first home. The advisor doesn’t communicate this gift to the accountant and the client forgets to bring it up next tax season. As a result, a gift tax return isn’t filed.
- A wealthy family does extensive work with an estate planning attorney to write a host of irrevocable trusts that will help them carve assets out of their estate now to save on estate tax later. The attorney never communicates the creation of these trusts to the financial advisor and the trusts ultimately do not get funded by the client.
- You draft an Irrevocable Life Insurance Trust (ILIT) so that insurance proceeds can be excluded from your estate when you pass. However, the insurance broker isn’t aware of its existence and titles the insurance policy in your name individually, defeating the entire purpose of the ILIT.
It can be tough to act as the middleman between all of your different professionals, and communicating strategies on their behalf can be a tough task to take on. The best way to mitigate this is to introduce your professionals to each other and tell them that you expect them to coordinate on your behalf.
Tip #2: Gifting Up to the Annual Limit Each Year
A great start and simple way for families to get assets out of their estate is to gift up to the annual gifting limit each year. This allows you to move assets to the next generation without dipping into your lifetime exemption. Wealthy families normally think that this is a drop in the bucket of their estate. However, they often forget:
- Your spouse can also gift up to the annual gifting limit to your child.
- You and your spouse can also give to your child’s spouse each year.
- You can make gifts in both December and January to make a larger gift in a short period of time but spread it across two tax years.
Real Life Example
I had a discussion with a client about this back in 2022. He wanted to surprise his 4 children with a very generous Christmas gift of $50k/child and he was very excited to present them with a check from him. However, this individual was also someone who would owe estate tax after he passed and so every dollar above the gifting limit was going to end up costing his family in the long-term.
By simply suggesting that he and his wife write 4 checks instead of 1 (2 before Christmas and 2 in January), he was able to split the gift over 2 tax years and both give his children a great surprise and ensure that they give less to the government when he passed.
Tip #3: Paying Descendants’ Medical and Educational Expenses
Whether it’s for a sports car or a hospital stay, parents assume that all gifts are made equal. However, that is not the case. Payments that are made directly for medical expenses or tuition are exempt from the gifting limits and can be a great way for parents to get money out of their estate and help their children with extremely important expenses.
I always tell parents that the best gift you can give your children is to pay for their children’s schooling. With how expensive medical stays and college costs are, even families with millions above the exemption limit can find that this is a worthwhile way to whittle away at their estate.
Warning: The biggest mistake people make here is that they will give the money to their children and tell the children to pay the medical or tuition bills themselves. This defeats the whole purpose of the exclusion. You have to make the gift directly to the medical or educational organization.
Tip #4: Using Intra-Family Loans for Large “Gifts”
One issue families run into can be when their child needs their help with a large purchase, such as a home. Even if they gift-split with their spouse, gift over 2 tax years, and gift to their child’s spouse they may not come close to the total amount needed for a down payment.
This is where an intra-family loan can be a great tool in the tool box. This is a loan agreement between parents and a child where the child can receive a cash infusion and the parents can keep their estate tax exemption intact. The terms of this loan can also be more flexible than your typical mortgage by potentially allowing a longer payback period and lower interest rate. I always suggest consulting an attorney to properly draft the loan document.
Pro Tip: If the loan is structured properly, you may be able to forgive loan repayments for principal and interest up to the annual exclusion each year. This may allow you to give multiple year’s worth of annual gifts up front without dipping into your exclusion while also keeping more money in your child’s pocket through the forgiveness of loan payments.
Tip #5: Using Irrevocable Trusts to Carve Assets Out of Your Estate Now
Irrevocable trusts are commonly used in estate planning for ultra-wealthy families who do not want their children or grandchildren to access the money during their lifetime. However, they are not always a must. Below are a few pros and cons to consider before implementing irrevocable trusts:
Pros
- Irrevocable trusts can allow you to carve assets out of your estate even though they may lower your estate tax exemption. If the assets grow substantially in the trust, it will not trigger any additional estate tax because the assets are already out of your estate.
- Irrevocable trusts can allow you to put guardrails around who will have access to your wealth and how quickly they can access it. This is great for spendthrift spouses or troubled children.
Cons
- Irrevocable trusts typically cannot be changed once they are set up and funded. If you change your mind on how the trust is written or who the beneficiaries are, you may be out of luck.
- Many irrevocable trusts do not allow you to access those assets after they go into the trust. If you overfund an irrevocable trust and then run into money problems before you pass, you may have a big problem on your hands.
Tip #6: Superfunding 529 Accounts Now
One of the concerns of wealthy families in their 70s and 80s is that they will not be able to get their assets out of their estate fast enough. They feel that the annual gifting limit is too limiting and that it will take them decades to get a sizable amount of their assets out of their estate and to their family. And, if they pass before they get to that point, they will be paying more in estate tax.
Enter the “superfunded” 529 strategy. This allows you to get more out of your estate right now, lessening the above concern. Essentially, this strategy allows you to make 5x the normal gifting limit into a 529 in a single calendar year. As an example, the 2025 gifting limit is $19k per person ($38k for a married couple). That means that a married couple could fund up to $190k in a single tax year for a grandchild’s 529.
Warning: Once you make a superfunded contribution, you cannot gift additional assets into the 529 for the next 5 years. Additionally, if you are contributing to a state sponsored program (like Illinois’ Bright Directions program) you may be missing out on future state tax deductions by superfunding in a single year. I would definitely recommend talking to Casey to see what is the best fit for you.
Tip #7: Consider Funding the New Trump Accounts or Grandchildren’s Roth IRA Accounts
When they reach retirement, many parents and grandparents tell me that they wish somebody had helped them start saving for retirement in their teens or early 20s. The good news is that today there are a multitude of ways that these individuals can help their children and grandchildren get ahead on retirement saving. Historically, when their children or grandchildren start working in high school they use the opportunity to set up Roth IRA accounts and start funding those accounts now that the kids have earned income.
Additionally, part of good generational planning includes staying up-to-date on changes in the retirement landscape. In July, President Trump signed a new bill that allows parents/grandparents to start a retirement account for their children as soon as they are born. Each year, people can contribute up to $5,000 into these new accounts. Additionally, for children born in the next few years, the government will also contribute $1,000 to new accounts that are created to jumpstart this program.
However, remember the old saying “pioneers get the arrows, settlers get the land.” There are a lot of details and clarifications that need to be ironed out with Trump accounts. It is not perfectly clear how the funds can be used and how it will affect the gifting limits for each year. Make sure you wait to understand the rules before jumping in with both feet and costing yourself long-term. Additionally, this is where professionals like Casey can be vital in helping you navigate these issues as things change.
Tip #8: Fund Life Insurance with IRA/401(k) Assets
Hypothetical Case Study
John and Judy have decided that they are going to wait until after they pass for their children to inherit their wealth. They want to maximize what they leave behind for their children but they just do not think their children are ready to inherit it yet. They are also extremely wealthy and have millions in IRA assets that they do not need to live on each year due to their sizable estate.
If they wait until they pass, their children will inherit those assets but they will have to empty the IRA accounts in 10 years and will have to pay the top tax bracket on those dollars due to the size of the accounts. However, if they proactively plan now, they may be able to start drawing down on those IRA funds at a lower tax rate and use them to fund a life insurance policy.
Unlike IRA assets, life insurance proceeds are inherited tax free; furthermore, if they are great planners they could also consider putting the insurance policy inside of a Irrevocable Life Insurance Trust (ILIT) which would also make the proceeds free from estate tax.
In this case study, John and Judy are able to find the best of both worlds through proactive planning. They were able to maximize what they left behind what they left to their children but they were also able to pass along their wealth at what they felt was the appropriate time.
Tip #9: Write a Family Wealth Philosophy
My Client Joe
This year, my client Joe called me to get my two cents on discussing his wealth with his children. He had just redone his estate plan, which helped him cover how his assets would flow if he and his wife passed away. But, I could tell that Joe didn’t feel it fully covered what he wanted it to cover. It didn’t cover his experiences with wealth, the lessons he learned, and his perspective on what wealth meant to him. He also had talked to his children briefly over the years with his thoughts on how to handle their finances, but he wasn’t sure if everything completely sank in.
So, just like his trust and his wealth, I suggested he put these thoughts on paper to share with his descendants when he passes. Here are a few snippets that came out of this project:
- He expressed to his children his personal definition of “wealth” and told them how he didn’t feel truly wealthy until he created enough passive income each year to cover most of his annual living expenses.
- He shared with them how gifting to charity in his later years positively impacted his life; at the same time, he mentioned how he found it important to know exactly where those dollars would be spent after gifting (perhaps stressing the attractiveness of giving to local charities).
- At my suggestion, he shared with them some stories of the successes he had investing in real estate over the years. I also suggested he mention how many of these successful projects dragged on years beyond his investment timeline, which was not ideal from a cashflow perspective. I think this provided a great dichotomy of investment success and liquidity constraints.
His end product wasn’t preachy or filled with cliches. It was simply a father’s perspective of his success being passed along to help his children be successful.
McCabe & Associates Helps Clients Get Ready for the Great Wealth Transfer
Hopefully this article has exhibited that our team here at McCabe has thought deeply about this issue and the several important variables and considerations at play when it comes to the Great Wealth Transfer.
We recognize that families need a trusted ear to listen to their concerns and a sharp mind that can suggest and implement strategies to preserve their wealth across several generations.
As a family business ourselves, we know how important this is and stand ready to meet with you and your family and look forward to the opportunity to maintain and pass on your family’s legacy.
