Wealth Tips: Making Kids Rich – Episode 565

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. Today, we’re going to be talking about a Twitter thread, which is the rich use many tricks to make their children millionaires and reduce taxes. First, Kim, why do you think he puts the and reduce taxes in there? Because taxes are our biggest expense. That is a quote from Tom Willwright, CPA, and it is something that is easy to overlook, especially when you’re a W-2 employee and you just don’t feel like there’s anything that you can do. And then when you’re not a W-2 employee, you do everything that you can do to reduce taxes. I mean, that’s the first job of an entrepreneur is to figure out legally how to follow the tax code so that it

[00:51] is in your benefit. And the more we can do that, the more money we keep. Absolutely. You said something in your language, again, all of our returning listeners are going to be like, okay, that every word is intentional. There was no mention of loophole or getting around. It’s called following the tax code. So they tell us what to do, and we decide to do it or not, correct? That is 100% correct. That has been true since the beginning of time. There are so many quotes. The one that comes to mind is Judge Learned Hand. He’s very often quoted and he literally says there’s nothing sinister about creating your affairs in such a way that you pay as little tax as possible. I’m paraphrasing the quote, but it’s close and I know he’s the sinister word. So it is an American’s duty

[01:41] to create value, pay only the appropriate amount of tax for their activities because their activities create more value. And that’s what human beings are put on this earth to do. And that’s what the US government wants its citizens to do. That’s exactly right. Yes. So we’ve covered a bit of the taxing. We’re now going to get into what the millionaires do to help their kids become rich. Again, millionaires, that word, it’s not as powerful as it used to be, but we’re still going to cover some of these pieces. It’s roughly nine items that we’re going to cover. We’re going to see which ones you agree with. I don’t think you’ll agree with all, but that’s the reason why we have it here. So here we go. The first one is set up a trust. That is one of the things that they

[02:34] suggest to do to help your kids become rich. Do you agree or disagree? I do agree. So there are very different levels of trusts. The revocable living is the most normal first step and really not appropriate for a minor child. And then there are all kinds of irrevocable trust. And we have to be very careful with irrevocable trust because the word irrevocable means what it means. Nevertheless, for wealthy families, rich families, whatever word you want to use is a very common strategy. I’m very pro trust work and asset protection work, which some types of trust protect assets. Others don’t. And let’s also admit that we don’t know how this sweet little six month old or 16 year old or whatever age

[03:19] the child may be will live their life. So protecting assets is a very important aspect of building. And again, protecting wealth. You always want to keep an eye on both sides, build and protect. Yep, absolutely. Okay. So that sets it up pretty well. Again, for the specifics of, we’ll call it the timeline of your life, old or young, you’ll need to navigate that properly. If you do have questions, send an email to hello at prosperity thinkers.com. We’re going to go to the next one here. So this is the one I’m gonna say, I think I know what Kim’s going to answer on this. But his second point is custodial Roth IRA. What do you say? I knew it was going to be a Roth IRA. It’s the most common go to place. And there’s nothing inherently wrong about a Roth IRA,

[04:12] because frankly, it means nothing. A Roth is just a structure that enables assets to grow without taxes. And that is valuable. But what are you going to put that money in? In other words, the Roth is like an umbrella and you have to have something underneath the umbrella. And therein lies the question. So I’m fine with Ross. They’re not my total favorite, because they do lock the money up until the child was 59 and a half. Now there’s some rules about removing principal and such. But more importantly is what on earth is that second half of the decision going to be? And there are so many investments that can go into Ross that are fraught with risk. They have such potential for losing that money,

[04:59] which of course defeats the entire purpose. So just be conscious that if that’s the route you’re going to go figure out what you want to invest in before you put that money in and lock it up for what is literally going to be decades of time. Yeah, long, long time on that. And plus we’re not talking about a significant amount of money that can be added to it either. So that’s correct. So again, for a family, depending on the wealth that they have, this is going to be a very small percentage of the play. And you mentioned you’re giving up the control. So I had my suspicions which you’re going to answer on that. That’s good. All right. So number three, parents taxable brokerage plus gift tax exemptions. Interesting. So parents taxable brokerage. I mean, that’s just

[05:55] like basic nothingness. That’s just your typical stock account or index fund or whatever. But I guess the focus then is the taxable gifts. So as the current law, you’d have to look it up for the year that you’re in at the time. I think it’s 17,000 for the year 2024. That is an amount of money that every individual can give to another individual. So for example, if you had a husband and a wife, they could give two times that number to a child every single year, like clockwork, no deduction on the parent’s side, no taxable income on the child’s side. Very, very common strategy, very effective. It is an irrevocable gift. And again, you beg the question, what’s the second half of the equation? Where are you going to put that

[06:40] money? Now there are also very, very large lifetime gifts that can be taken advantage of in whole or in part, depending on the family situation. And these can be valuable too. What I will say, and I guess we could just check off that I’ll agree with this particular point, is that if it is appropriate to pay gift tax, in other words, to go on and go above the limitations and pay some gift tax on the money, typically speaking, gift tax is actually less expensive than estate tax, which is what would get paid upon both parents’ deaths. So it is something that is worth looking into. It is absolutely, however, a loss of control. It is absolutely. Okay. So we’ll say probably majority of agreeing with it, but you got to

[07:31] figure out what the situation would be. All right. So the next one, number four, 529 plans. Cross it off the list. Please do not consider it. It’s my least favorite space. Absolutely. There’s some exceptions. There’s some states where the environment is very, very favorable because you get some additional state or even county level capability in the space around your contributions to 529 plans. But problem number one, complete loss of control. Problem number two, it’s going to actually hurt the child if there is any chance that they could get any type of aid for school. Problem number three, did I say loss of control already? It’s such an issue. Problem number four, second half of the equation again, what are you going

[08:17] to invest in? And the statistics are really starting to show up over and over that the funds, the mutual funds that are typically available inside 529 plans do not perform nearly as well as just regular mutual funds that are out in the market for everybody to purchase. So this is a tricky area. People are so attracted to it and it is absolutely the last strategy that I would consider. Okay. I don’t think we could be more clear than that. That was good. Number five, hire your kids legally to reduce taxes. Now this I love. Tom Willwright has been suggesting this for years. Our favorite CPA to follow. We did this when Robbie and Kaylee were very, very young because there are age appropriate things that young children can do like be a model for pictures. And is the

[09:11] sentence says legally, like do it right, document it properly, pay them properly, handle payroll appropriately, make sure you’re continuing to document and that they’re doing age level appropriate things. And in today’s world, sometimes your kids are better at doing things than you are. Their social media capabilities are amazing. Their complexity around the computers is really off the charts. And it’s so, so cool if you have a business or you’re building a business or you can create a business to get involved in the space of hiring children because the skills that they learn, the mindset that they learn, the capabilities that they learn are actually far, far greater than even the tax play that you will benefit

[10:01] from and they will benefit from as well. It’s a huge, huge valuable ad. And I would encourage you if you have a business, it should be an absolute no brainer. If you don’t have a business, find a business, brainstorm with your kids, get them involved, create whatever it takes from the corner lemonade stand to, you know, people’s yards and mail and walking the dogs and etc, etc, etc. It’s an unbelievably valuable transaction to take place with and skill set to pass on. Absolutely. Totally agree with that. And one of the things you’ve mentioned time and time again on the podcast is regardless if you’re a W2 employee or if you’re already a business owner, you should own a business. And I don’t like to use the word should,

[10:50] so I’m going to say you need to own a business because you will want to. Yes, it’s that important because of, and I’m going to mention point number six on the list, read books to teach financial literacy. I know what your response is on that one. So you and I’ve done a whole podcast on the difference between financial literacy, which is so commonly used today, and financial capability. So let’s work backwards on this. Yes, you want to help your kids learn money, but teaching money and learning money don’t typically come from books. Now there’s a way to properly incentivize book reading. And of course I love books and there are some children that will learn best that way. But I believe that one of the most valuable

[11:40] questions that you can ask is how do you learn best? And you can ask your child this if you don’t know from observation and some of them learn best by reading, some by watching, some by listening, and some of course by getting their hands on things. And so it is financial competency that you’ll want to be working with your children on. And we have a fabulous benefit in this space. So if you have children of frankly any age, it is never too young to start and there is no such thing as too old either. I don’t care if your children are in their twenties and thirties. We have some resources in this space that are incredibly valuable. Please reach out at hello at prosperity thinkers.com to get access to them. Some of

[12:28] them are paid resources and they’re worth every penny because teaching financial competency should be number one on a parent’s list. And yes, some financial literacy will go along with that. Yeah, absolutely. So what I love about point six and point five, taking these two together, which is teaching about the financial literacy and reading books and then having a business to reduce taxes is as you mentioned, there’s only so much that we get from reading and then we get the other half from doing. And having that additional capital is where you can have those savings accounts as you’ve mentioned. You can have other tools at your disposal. So you’re learning and applying, learning and applying, getting that feedback. We never want

[13:19] to be the people that just dream of things and then never do. That’s not a place of prosperity thinking. So let’s go to point seven, compound interest and time. What do you think? So compound interest is often talked about as the eighth wonder of the world. And of course, over time, it can be incredibly valuable. However, with it comes a growing tax. And this is interesting that they bring this up in light of the promised title about reducing tax. And so just play this out for a little bit. If you as a 10 year old are able to earn $10,000 in a summer, which is not unusual for some entrepreneurial kids, hint, hint, there is a way to cut your child rearing costs in half researched and proven if you do some things

[14:09] right. Nevertheless, take 10,000 figure that it grows and grows and grows and grows over the lifetime of a child’s well over a hundred years. The amount of tax that gets paid every single year creates an opportunity costs because when you pay taxes, you have lost that money. There is a cost there that will in time outrun the account that is being built. It is substantial. And so while I absolutely love compound interest, it’s why things are sought out like Roth IRAs. And maybe we’ll get to our other favorite tool here that is sought out in order to have a space where that annual tax does not have to get paid legally, not have to get paid. So compound interest away. Yes. And you better be looking for

[15:06] something to help you with the taxes and the opportunity costs that are going to occur year after year after year for the rest of that child’s life. Yes, I love that. That’s awesome. All right. We’re going to round out points eight and nine. I’m going to combine them together. I have opinions on it. Those don’t matter because I want to hear what you say, which is eight says, make your child a millionaire by 25, invest 150 a week in the S and P 500 or invest $11 a day in the S and P 500 to make them a billionaire by 30. How do you feel? Okay. Okay. Okay. So yes, with some assumptions, huge, huge assumptions, meaning the average return that the S and P 500 historically has earned, yet that is such

[15:59] predication on the fact that it’s actually going to do that for the next call it 20 years or 30 years, you know, depending on how old your child is. And so what’s sad is even if you can pick an S and P 500 index fund, which of course you can average rates of return are not the actual rates that us human being investors get. And so it is so easy to look in the rear view mirror and say, yeah, that’s a 10% average, 12%, you know, whatever the rate of return average is. However, going forward, because of the fluctuation that is absolutely going to occur in even a 20 year space, the actual rate of return is not going to be that average. In fact, in most cases, it’s drastically less. You can even go to something

[16:48] like Dalbar.com, which does lots of research on investment return versus investor return. And the investment return is double digits. And the investor return is in the three to four percent range because of fear and this issue of average versus actual. So while sure, you absolutely can and should be setting aside X dollars a week, month, whatever the time frame is that you want to think about. Do not fall prey to the false assumptions there that an average rate of return is going to be your actual rate of return. And while the habit is good, the placement could be better. Very concrete. And we’re going to look at that and we’re going to say one of the other tools that our listeners can use when

[17:46] they’re looking at complex numbers or even simple is to use a calculator and calculations that make sense. Truth Concepts, your husband Todd has created, founded that. And just looking at the sound information. So we’re going to round this out with a number 10. There is no 10 on the list. So the 10 is going to come from Kim. What is one that you want to add to this list? Doesn’t have to be the silver bullet. What is one item that families can do to help their children become wealthy? I am shocked that this was not on the list at all. Not even like in a little fine print. Maybe you can possibly do this. Nothing. Let’s see it. Let’s see it. It’s to purchase life insurance on your child. And if that doesn’t work for you,

[18:31] purchase life insurance on yourself. Now we’re talking about whole life insurance, something that most of our listeners are extremely confident in, comfortable with, and well versed. And this space, whole life insurance from a mutual company, we’re talking Guardian, Mass Mutual, New York Life, Northwestern Mutual, Penn Mutual. Find an agent that can help you understand this. If you do not understand it and look at this centuries old space of facility efficient wealth building and wealth protecting because the life insurance is going to be that slow and steady. It’s not going to be the roller coaster ride of the S and P. The life insurance is going to grow every single year without taxes. And as long as that policy stays enforced, those dollars will never be taxed

[19:23] and the life insurance will pass to the next generation income tax free. So you do have a silver bullet there. And I’m happy to stand here and say that because I’ve seen it work over and over and over and over again. And frankly, it doesn’t matter who the insured is. It could be grandparents. It could be parents. It could be children. I will state that as a parent, if you don’t own insurance on yourself, life insurance companies do not like you trying to buy life insurance on your children. And so you can buy insurance on a 30 or 40 year old, have that grow in today’s marketplace at a very boring, yet extremely effective, low conservative rate of return. That’s going to be a little bit better than savings accounts and it will grow and grow and grow

[20:10] uninterrupted, untaxed and be there for you with complete confidence to utilize because life insurance, unlike the Roth is not locked up until any age. There is no age pre at anything that life insurance cuts off or is limited by. And so whole life insurance, not universal life, not index universal life, not variable life term insurance. If you don’t have any money, beautiful. And if you have a little bit of extra money or a lot of extra money, you will want to look at whole life insurance on every single member of your family. I love it. That’s great. That’s a good silver bullet there. So Kim, I would assume that it’s not on the list and it doesn’t make the list of a lot of people either because it’s not a product that they offer or sell, or it’s not something that

[21:05] they fully understand. So if you as a listener are in a situation where you don’t fully understand it or you’re trying to figure out where does it fit in the puzzle of life with your family, send an email to hello at prosperity thinkers.com. That way you can talk it through. Every family is unique. No two families are the same. That way you can find out exactly what works for you. So this was cool. I’m glad we went through the nine and you gave us the 10. That was fun. I love it. That was a great find Spencer. Good work. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.