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

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 . 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 . 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 .

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 . 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 . 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 . 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 .

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 ?

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 . 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 . 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 . 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 . 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 . 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 . 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 .

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 . 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 . 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 . 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 . 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 ?

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 . 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 .

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 . 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 .

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 . 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 . 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 . 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 . 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 .