By Ted Stricker, CFP®
Affluent families with young children face interesting challenges when considering effective methods to transfer and build wealth for future generations. Depending upon the family’s circumstances, a comprehensive strategy that considers and addresses immediate needs (such as education funding) and longer-term goals (such as wealth transfer and legacy planning) needs to be employed.
At Bernath + Rosenberg, working with multi-generational families in these areas is a core service we provide to our clients. Our experience has shown that open and deep discussions about family’s goals across generations, coupled with a thoughtful and integrated planning, can yield beneficial results, including:
- Clear goals about retirement and education
- “Teaching moments” to educate children early about money, finance, and investing
- Establishing a family “mission” that aligns values with financial stewardship and guide future philanthropic endeavors
Let’s take a look at some ways to accomplish these objectives.
Education Planning and Saving
College isn’t getting cheaper. And with the latest legislation that became law on July 4th, financing college through federal loans may be more difficult in the future. This means starting to strategically plan and save early for future tuition and expenses is even more imperative.
Section 529 college savings plans offer many tax advantages to suit this purpose. These accounts offer tax-free growth and withdrawals for qualified educational expenses, which include K-12 private tuition. In addition, many states, such as New York and New Jersey, offer state income tax deductions for contributions to their own state-sponsored 529 program accounts.
Contributions can also be gifting and estate-planning opportunities. Using the Annual Gift Exclusion, contribution gifts up to this exclusion limit to 529 accounts are not reportable to the IRS, and you can contribute up to five years’ worth of gifting limits at one time without triggering gift taxes. What’s more, the owner (Participant) of the 529 account has total control of the funds within, even when the beneficiary child-student reaches the age of majority. 529 account beneficiaries may be changed each year to other relatives as needed or desired.
Consider Custodial Accounts
Custodial accounts are opened for the health, education, and welfare benefits of a minor child. The account functions in the same manner for most other accounts and may be opened as a bank checking, savings, or certificate of deposit account or as an investment brokerage account and can hold most common financial assets, including stocks, bonds, real estate, and annuities.
There are two types of custodial accounts: the Uniform Transfers to Minors Act (UTMA) and the Uniform Gift to Minors Act (UGMA). The UTMA is allowed in all states except Vermont and South Carolina. The UGMA is allowed in all 50 states. For these accounts, an adult is the custodian and directs how the account is managed. The account is controlled by the custodian for the benefit of the minor beneficiary until that beneficiary reaches 18 or 21. Thereafter, the account must be retitled in the name of the beneficiary.
There are many advantages and some disadvantages of custodial accounts. Advantages include:
- Great flexibility (no contribution or distribution limits)
- Wide diversity of uses (not just for educational reasons)
- Tax advantages (known as the kiddie tax), but watch the rules!
Disadvantages include:
- Irrevocability (gifts to the account are irreversible)
- The account must pass to the beneficiary upon reaching 18 or 21 (loss of custodial control).
- These accounts are considered “student assets” in the college financial aid formulas and could hurt aid eligibility (though for affluent families who wouldn’t qualify for need-based aid, this may not be an issue).
Establish Long-Range Estate Planning
In your estate planning, consider how assets may pass to your children, both during your life and then later on as they grow up. Determine how to effectively and tax-efficiently transfer wealth to them to reduce estate tax liability, provide for their future needs in trust provisions, and appoint appropriate trustees and guardians who share your values and beliefs for their welfare.
Utilize the Tax Code and Income/Asset-Shifting Strategies
Affluent and high-income families often use income-shifting and asset-transfer strategies from the higher-taxed parent(s) to the low-bracket child (via the kiddie tax rules) to save on tax liability. Family businesses often hire the child as a legitimate employee and income earned by the child may go toward education savings and expenses, funding a Roth IRA, or other uses while the business deducts the wages as an expense. Through their own standard deduction, the child’s income may escape taxation and any extra income would be at their low bracket.
Through gifting strategies, income-producing assets may also be transferred to a custodial account for the benefit of the child. Income from these assets (dividends, interest, capital gains, and even “leasing” these assets to the family business) may help finance education or other purposes, even after the child becomes an adult and takes possession of the account.
Engage Children in Family Financial Discussions
Use family discussions to teach money concepts to children early and involve children in the reasoning behind financial decisions you make. After establishing a custodial account or other such investment accounts, use simple explanations of investing in stocks, bonds, mutual funds, and other holdings to explain basic investment concepts.
Set an example of charitable giving and involve the children in deciding recipients of annual bequests. The old concepts of allowances, spending within one’s means, and saving for the future are as relevant today as ever.
Let Us Help You With Family Financial Planning
Multi-generational planning services are just a sampling of the wide variety of financial services we offer at Bernath + Rosenberg. We’re here to help families with all aspects of their financial lives to pursue what’s truly and uniquely important to them.
Our experienced team of Certified Public Accountants and CERTIFIED FINANCIAL PLANNER® professionals stays current with the latest in tax laws and planning strategies to help you pursue a rewarding and comfortable life, according to your unique and special objectives. By coordinating your overall tax strategy, investment management, and financial planning with your long-term goals, we can assist you in avoiding unpleasant surprises that could disrupt your retirement or legacy objectives.
To get started and make the most of the wealth you’ve accumulated, schedule a meeting by calling (212) 221-1140 or email tstricker@brwealth.com.
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 26 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining innovative approaches and solutions that reflect clients’ personality, lifestyle, and goals.
Professionals associated with Bernath & Rosenberg P.C. may be either (1) registered representatives with, and securities and advisory services offered through LPL Financial, Member FINRA/SIPC, a registered investment advisor; or (2) solely tax professionals of Bernath & Rosenberg P.C., and not affiliated with LPL Financial. Tax/accounting/CPA-related services offered through Bernath & Rosenberg P.C. is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax/accounting/CPA-related services.
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There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
