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Case study: Thinking about your legacy in your 60s

By John R. Berry, CFP®
& Beth H. Watson, CFP®

Here at Corner Post Financial Planning, we get a lot of questions about the taxation of gifts and estates. Many clients both wish to help their heirs both now and in the future while giving as little to the government as possible.

 In this case study, we will walk you through a common example with a couple who has “enough,” but whose estate is unlikely to tip into taxable territory under current law. Right now an exempt estate is $23.4 million for a couple. Americans can give away this amount during their lifetimes or at death and it will not be subject to the federal estate tax, though the amount is set to go down in a few years.

Meet Robert and Patricia McBride, our hypothetical 66-year-old retired empty nesters. They’ve ticked off two bucket list trips and enjoyed a year of morning coffee dates and no alarm clock. While they enjoy traveling and not working, they’ve realized that the most important thing to them is to spend more time in the lives of their children and grandchildren.

To start with, the couple moved to Dallas, where their twin daughters live with their families. In addition, McBrides, clients of Corner Post since their early 50s, have worked with us on a strategy for making smart gifts to their children’s families.

The McBride twins, Jennifer and Elizabeth, are now 42 years old. Both are married with two children. Their parents paid for their college education and their first cars. Except for a short stint following a divorce Jennifer experienced in her 20s, Robert and Patricia haven’t provided any financial support since their daughters graduated from college.

The McBrides are set for retirement: They are financially disciplined and we’ve calculated they will end their lives with around $1.9 million in today’s dollars. This amount, or whatever their estate ends up being, is set to transfer to their daughters via a combination of beneficiary and transfer on death designations suggested by an estate planning attorney we recommended.

After some back and forth, we agreed with the McBrides they could afford to take $250,000 in cash “off the table” for their goal of seeing their children enjoy part of their inheritance. The retirement calculation mentioned above does not include these funds.

In the course of our visits about how best to help their kids, Robert and Patricia acknowledged the high cost of raising children and said they were willing to consider any of their daughters’ proposals to help lighten the cost of parenthood.

Provided the appropriate filings are made, IRS rules allow the McBrides to gift $60,000 to each child and their spouse per year. They can also gift $30,000 to each grandchild annually or put $150,000 per grandchild into a 529 account.

Obviously, the McBrides do not have the resources to do all of these things. Still, $250,000 is a lot of money. The McBrides worked hard in their careers and they take this amount of money seriously.

We admired their next step of sitting down with each child and her spouse and discussing the gifts. Not everyone who gives their children money is so thoughtful. The McBrides told each daughter they had penciled in $60,000 per couple and $65,000 for each set of grandkids.

What follows is each daughter’s proposal to her parents stating how the money could best help them. The twins are responsible and self-sufficient, and their parents ultimately agreed to both plans.

Elizabeth’s proposal. Elizabeth and her husband told her parents that they would like their $60,000 over two years, $30,000 each fall. For those two years they would use the funds to offset living expenses while maxing out their 401(k) accounts. Using the cash gift in this way would help them lower their taxable income via the 401(k) contributions. For her children’s portion, Elizabeth asked her parents to establish 529 accounts with her as the successor trustee and make age-adjusted deposits (i.e. a little more for the older child), using all the funds. The money would be used to help pay for college.

Jennifer’s proposal. Jennifer and her husband have deferred maintenance on their older home while sending their boys to private elementary school. Further discussion reveals they are behind on retirement savings due to Jennifer’s husband returning to college for an MBA. Jennifer proposes that her parents simply pay for her sons’ school tuition until the $65,000 is exhausted, which will take about three years. This will give Jennifer and her husband an extra $20,000 each year in cash flow to fix their house, as well as pay off the last MBA student loan.

 For their own part of the early inheritance, Jennifer and her husband request that the $60,000 be paid out over 5 years so they can maximize their Roth IRA contributions ($12,000 per year total). They do not have the goal of lowering their taxable income as Elizabeth and her husband do, but do want to keep their inheritance free of tax by putting it into a Roth.

Conclusion. As planners we like the fact that the McBrides worked with their daughters’ families to lay out the expectation that the money not be frittered away, while listening to their kids about how the money would be most helpful in the present.

In most planning situations there is a mathematical way to maximize gifts. While in our opinion neither of the above scenarios represents a textbook answer, these strategies are reasonable, real-world solutions. They improve the McBride daughters’ lives not just in the future but right now as well.

In addition, all of these gifts will be untaxed because they are at or below the IRS annual exclusion amount. Depending on how the money goes into the 529 plans, the McBrides may have to fill out IRS form 709.

Again, most estates are untaxed by the federal government, and most ordinary families can make good-sized intergenerational gifts with no tax and zero to very little paperwork. We urge you to work with your estate attorney, tax professional, and financial planning firm to maximize the effectiveness of the wealth you’ve built that you want to share with your heirs.

John R. Berry and Beth H. Watson are CERTIFIED FINANCIAL PLANNERTM professionals at Corner Post Financial Planning.


Internal Revenue Service resources:
Instructions for IRS form 709: Gift and Generation Skipping Transfer Tax Return

Unlimited education and medical gift exclusion information
Frequently asked questions on gift taxes


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Neither Corner Post Financial Planning nor LPL Financial provides legal or tax advice.