At that time, parents frequently start by making gifts using the annual gift exclusion. This exclusion amount may be gifted with no tax or reporting to the IRS. The annual exclusion in 2018 is $15,000 per child and is adjusted every two to four years.
Generally, it is better to give property than cash, as cash tends to be spent more quickly. Regular gifts of cash may result in a child acquiring a taste for expensive items that are above his or her normal lifestyle.
By making gifts of stock, land or other types of property, parents encourage children to invest and build their assets. Therefore, a good gift is a gift of property.
PRINCIPAL WHEN THE PARENTS PASS AWAY
The second gift strategy is to transfer principal after both parents pass away. This can be a bequest from the estate of the surviving spouse. The principal could also be a distribution from an insurance trust that pays to the children after both spouses have passed away. The transfer of principal could be a specific property such as a home, land or securities, or it could be simply a portion of the estate.
INCOME FOR A TERM OF YEARS
A very popular third option is to create a trust that pays income for a period of 15 or 20 years to the children. For larger estates, this is usually a charitable remainder unitrust. The trust is funded after both parents have passed away. It pays a five or six percent annual income to the children. In many cases, it is very advantageous to fund the trust with an IRA or other qualified plan. The trust earns income for the family for the selected number of years. At the end of the 15 or 20 years, the trust is then transferred to favorite charities.
The combination of some principal and income for a term of years is very helpful. Parents can treat their children equally; however, there are some children who may require a longer period of time to mature in their financial management. The combination of principal and income for a period of years allows these children the time to learn better money-management skills.
The fourth option is an additional payment of principal when the children have become more mature. Following the expiration of the payouts for the unitrust term of years, an additional amount can be distributed. This frequently is done through the "Wait a While" trust. Your attorney may have another name for that trust—the charitable annuity lead trust.
For the term of years that the children were receiving unitrust income under the third part of the plan, the charities receive the payouts from the lead trust. After the unitrust income payments have been made to children and that trust terminates, the children receive their delayed principal distribution from the lead trust.
KEYS TO SUCCESSFUL PLANNING
A successful “integrity and initiative” plan is created by understanding the four transfer options and then setting goals. These goals will frequently include a target amount for the inheritance for the children at each level. In addition, it is useful to create a total inheritance target amount per child.
For example, one parent wanted their children to receive $50,000 each year in income. Because a unitrust funded with $1 million paying a five percent payout produces $50,000, she decided to set up a unitrust of that amount for each child.
Over the 20 years, the trust paid more than $1 million in income to each child with the remainder then distributed to charity.
It’s important to consider these options when developing your legacy plan. Establish the overall target inheritance for your child or children, and then consider one of these four options or combination of options to achieve all your objectives.