Transferring Wealth to your Posterity – Episode 217

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. And once again, we have the president of Partners for Prosperity, Kim Butler with us today. He’s our co-host and we’re going to be talking about a subject that more and more this topic keeps coming up and it’s, I would like to give away some of my money to my children or grandchildren, but number one, I don’t want them to use that money to cause bad habits and abuse themselves and, you know, number two, I’d like to do it as tax-efficiently

[01:06] as possible. So, Kim, I’ll leave you with that. It is interesting how often that comes up and I’ve got a book that I’ve read that I’ll share that had some good ideas in it. It’s called The Opposite of Spoiled and the subtitle is Raising Kids Who Are Grounded, Generous and Smart About Money. And the author is Ron Lieber, L-I-E-B-E-R, The Opposite of Spoiled, Raising Kids Who Are Grounded, Generous and Smart About Money. And so it’s interesting when I’m talking with clients about this and more often it isn’t about a, say, 40-year-old wanting to give his 10-year-old money. The book addresses that without a doubt, but it also does have some ideas. And of course, what I’m going to focus on is the, say, 70-year-old that wants to give

[01:58] their 40-year-old some money. And I’m hearing this quite a bit from clients and it’s something that’s normal when people are in their later years and they’re starting to look at their monetary environment and realizing that, you know, I probably have got enough for me to live my life the way that I want to live it for the remaining time that I have. And so I would like to give money to my children and maybe I could find a way to do it so that they could benefit from it now where I could see them benefit from it rather than later. And I really like that idea. I think it’s super valuable. It’s something that I helped my grandmother do when she was at that stage. And it was a little awkward because I was one of the people that got

[02:48] the money. She was giving it to her grandchildren, in fact. But all of us grandkids were over 20, I would say even probably over 25 at the time. We’d established ourselves as responsible adults. And she had a lot of fun just giving us direct cash, five or ten thousand. It wasn’t every year, but every now and then, as she felt she had increased investments. But I’d like to share a way that although I brought this up with her, she wasn’t willing to do it. A lot of our clients have. And so this is obviously something that works for some people and doesn’t for others. And it’s a way to share your wealth with that adult child and yet keep a little bit of control on it, because I think one of the bigger concerns that people in their

[03:35] 70s have is still the potential of running out of money. So while they may feel like there’s a little extra, they’re just not sure. And so this method solves that problem. And it is the 70 year old buying, owning, paying for and being the beneficiary of a life insurance policy on their 40 year old child. And what that does is it enables the child to be well aware of the situation because a conversation is necessary. That child is going to have to get a physical exam, et cetera. It enables the child to be aware of like, hey, there’s a little bit of money here and maybe I can do something with it at some point. And it enables the 70 year old to be confident that they still have control over that money while they’re living so that if they did need it, they could use it.

[04:37] Now, it’s going to be up to them, the owner, the 70 year old, as to whether or not they want this 40 year old to be able to use it along the way, because they could, so the 70 year old could borrow against the policy, give some money to the 40 year old and request that the 40 year old pay that money back. And that would be a fabulous way to introduce the 40 year old who may or may not have good financial habits to the idea of paying themselves back, paying themselves back the principal. Of course, the interest in that case is going to have to go to the insurance company. And yet it’s a fabulous way for everybody to benefit for lots of people to have involvement with the same dollars. Does that make sense?

[05:29] Oh, it makes perfect sense. And, you know, we’ve kind of got a list of questions from our listeners that have kind of come in over time. And if we could just back up just a minute, one of the questions that we have is that if you decide that you want to give to your children or you want to give to your grandchildren, does it have to be all of them? And does it have to be equal? That’s a fabulous question. And the answer is with children or grandchildren, it doesn’t have to be all of them. It definitely doesn’t have to be equal. I will say that a lot of the insurance companies don’t really like it when you’ve got a situation where a 70 year old is buying life insurance on just one adult child. Sometimes we can get away with that.

[06:22] Sometimes they just feel like it’s not the best standpoint from a insurable interest environment. And so they say no. But there are definitely circumstances where it can be not equal. And again, there are definitely circumstances where we can get it approved that they just have it on one child, not on all, especially if there’s a larger family. The second thing is that when you’re giving to your children, most of these children are probably going to be married. So there’s a husband involved there. Is there a way to control whether the spouse of the person that you’re giving the money to has access to it? And kind of from the spouse’s point of view, is that something you should be offended by?

[07:16] So in the early stages, when the policy is started, the spouse nor the insured, the 40 year old, will have any access or control of the money. The 70 year old is the one that has the access and the control of the money. Now, going forward, let’s say 20 years later, the 70 year old is now 90 years old, they pass on. They’ve worked with somebody like our firm who has helped them put a secondary owner on that policy. That’s something that we always work to do so that there’s a very clear line of sight in terms of how the asset is going to transition to that now 60 year old adult child. At that point, if the spouse was still there, the husband of the 60 year old, in your example, in theory could still have access to it,

[08:16] although the owner is typically going to be the specific child. So one could argue that this was money set up from parents. It’s designed for me. In a court case, I think an attorney could make a good case that this is an asset that was not meant to be shared. It’s not community property, et cetera. However, your question is good. There is room for wiggle there, if you will. And it is absolutely something that I wouldn’t want to say for certain one way or the other. There are definitely, however, some trusts that could be put in place, some identification, some language, some legal documents to make sure that that other spouse couldn’t be involved. And no, that other spouse shouldn’t be concerned about that at all.

[09:08] I’m not saying they wouldn’t. But that’s something between the parent and the child. I just see such an opportunity with people living longer to want to see their money used by the people that they care about rather than waiting till post death. Is there a tax efficient way of transferring that wealth? Yes. So it is very possible for the owner, the 70-year-old, now 90-year-old, to give it to the insured without gift taxes for two reasons. One, you can literally transfer life insurance to an insured. And in this circumstance, they would actually be purposely using up some of their lifetime exemption. And if it was done ahead of time, of course, prior to death. And then if it was done after death, again, they want to have

[10:09] that secondary owner in there. They want to be clear that that’s the transfer. There really is not tax on inheritance unless we’re talking more than $5 million anyway. So there’s not a big tax concern to be on the lookout for because the policy is being transferred to the insured. And then, again, if it is before death, let’s say at age 80, the person said, hey, I know I’m going to have enough money. I want to go ahead and give this to you now. That 80-year-old can use up some of their unified exemption, which they really should be using up anyway. Otherwise, they’re going to lose it when they do die. So that’s a million dollars and it’s lifetime. And the policy, if it were underneath that level,

[10:58] in terms of cash value, not death benefit, but cash value under a million, that could be given tax-free. These situations look like they’re probably each and every one of them very unique, not kind of a cookie cutter type thing, aren’t they? Yes, very well said. And absolutely something that we can help with. Most prosperity economics advisors that are out about the country are fairly familiar with this type of strategy and I think would be more than happy to help as well. Where would you recommend somebody go if they’re, you know, listening to this and thinking, you know, wow, yeah, you know, I’d love to go sailing on my great-grandchild’s boat before I’m dead. Yeah. So we are just in the final stages

[11:47] of finishing our family banking book. And this has been a long time coming and our listeners may have been aware that it’s in the works. And so if they are interested to email us, hello, sorry, at partners4prosperity.com. So that’s hello at partners4prosperity.com, the special email that we’ve created just for our podcast listeners. And from there, we can see that they’re interested in the family banking book. We’ll put them on the list and alert them to that when it’s ready, which not gonna give a timeframe, but hopefully before the end of the calendar year 2017. Super. Well, I would encourage everyone to do that. You know, again, Kim has uncovered, I won’t say she invented, because the amazing thing is,

[12:40] is that most of the strategies that Kim has found have been around for a very long time. It’s just a matter of uncovering them. And in many cases, they’re not the financial best choice for the banks that would recommend otherwise. And I think that’s kind of one of the reasons that they’re hidden, don’t you? Absolutely. Yep. The banks and sometimes even the insurance companies don’t necessarily want everybody to know that this is available, and yet it is. So we like to get it out there. Super. Well, anything else you’d like to add before we wrap up? Well, just as you often do, to thank our listeners and express much appreciation for those that are benefiting from the podcast and that we welcome questions.

[13:32] And again, the email for that is hello at partners number four, prosperity.com. Super. Well, this is No BS Money Guy. Special thanks to Kim Butler and all the time that she takes to do what she does. And special thanks to our listeners for tuning in every week and listening to us. Take care, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.