Building a child’s wealth, financial literacy, and experience with handling money, while they’re young, is critical. Wealth is a matter of both money and mindset!
Start by being mindful of the consequences of your own spending and investing actions. Your goal is to ensure that the younger recipient or recipients of their inheritance, can get a head start in creating lifetime wealth, or simply some fun money to blow.
You may think about leaving an inheritance as the primary way to pass on cash or assets to kids or grandkids. These funds give recipients a “starter package” to financial freedom. Inheritance, however, is often seen as an option only for the wealthy.
Research shows, however, that money that is passed to the next generation, is squandered by the beneficiaries, leaving them no sustaining wealth at all. That’s where mindset comes in.
If you’ve not yet had these types of money conversations with your grown children, it’s never too late!
Practical steps you can take to build your children’s wealth starter package
First and foremost, talk to your kids – minor or grown-up – about money. So many of us land in adulthood with no exposure to or knowledge about basic and yet very important financial matters.
Talk to the children you love about the importance of issues such as:
- Spending less than you make so that you live within your means;
- Saving and investing money;
- The difference between gross versus net/take-home pay;
- Managing credit cards wisely, rather than letting them manage you;
- Paying taxes and monthly bills on time.
Avoid tax traps!
Parents should also think now about leaving money for their children and grandchildren in the most tax-efficient way possible. for example, favoring Roth over Traditional IRAs.
Money that goes into a Roth IRA is already taxed, so beneficiaries would receive those funds tax-free when they die. Traditional IRA funds, on the other hand, are not yet taxed, so any money going to those recipients would be taxed.
If those inheriting your money are in the lowest tax bracket of 10%, that may not be a concern. But, if they are in the 37% tax bracket, or would be pushed into it with the inheritance, that could make for an unpleasant surprise. Having a tax plan in place, to consider how assets may be distributed tax-efficiently, may significantly increase your wealth transfer.
Make smart use of Roth conversions
Consider converting any 401(k) (or 403b or 457) plans from former employers into a Roth IRA to take advantage of the favorable tax status to beneficiaries. This may take some maneuvering of account types, so I recommend letting us provide some guidance.
Life insurance as a source of inheritance
Invested asset values fluctuate, and can therefore reduce the amount you intend to transfer, depending on what the market is doing at the date of your death.
An alternative and powerful way to pass on wealth to the next generation is life insurance. Life insurance proceeds are generally tax-free to the beneficiary. Having a permanent life insurance policy of any amount also provides a source of generational wealth transfer.
Depending on your current cash flow, you may want to start with a term policy that allows you to convert it into a permanent policy in the future. Assuming you have a top-rated firm, that assures a defined dollar amount of assets to your beneficiaries.
Protecting assets with a trust
You may want to consider putting insurance or other assets into a trust. That would depend on the amount of money in question. You could specify some spendthrift provisions or other directions on the use of the funds. Doing so may also help to move life insurance proceeds out of your estate and avoid possible taxation. This, of course, depends on the size of your estate.
Please contact me for help in determining the best way for you to build wealth for your kids.