My wife and I are going to be old parents. We didn’t purposefully wait until our late-30s to have kids, but instead, we got lucky.
We got lucky because, after many tests, our doctors told us we probably wouldn’t be able to have kids.
Now we’ve joined the complex world of child-rearing, and I’m wondering how my friends and co-workers have had successful careers while raising kids over the years! It’s hard!
Having kids later in life allowed us to become financially independent by working through successful careers, and now we’re planning to help give our child opportunities I never had.
If you’re an Accenture Managing Director, there’s a good chance you’re in a similar position. Your kids may not experience the same financial hardships as you while growing up.
While the struggles you encountered shaped you and probably led to your success, your kids will experience new levels of possibilities thanks to your position in life.
We’ll use this post to explore the moves I’m making to help set up my kid for success and show you how working with me can unlock these opportunities.
Avoid the estate tax
One of my biggest objectives of successfully planning the passing down of multigenerational wealth is avoiding or minimizing estate tax.
We’re all hopefully a long way from worrying about this “death tax,” but the planning we do today impacts our odds of paying the government 40% of assets versus it going to our heirs.
While the current estate tax exemption of $11.7 million per individual or $23.4 million per couple might not impact you, there’s a good chance it will change soon.
When the Tax Cut and Jobs Act expires in 2025, the exemption rate will cut in half to $5.85 million per individual.
There’s no current talk of it going lower, but in 2008 the rate was only $2 million per individual.
We have to think about the lifetime limit because any gifts above the annual exemption cut into your lifetime exemption amount.
For example, if I gifted my child $30,000 in 2021, the amount above the current annual exemption of $15,000 counts against my lifetime exemption amount.
Sure, that means it’d only drop to $11,685,000, but these things add up, and new laws can change it quickly.
Strategic gifting to avoid estate tax impacts
To begin passing down wealth, I’m primarily using strategies to save for education and pass down gifts. There are various tools for this, but we’ll discuss the 529 plan, UTMA, and an irrevocable trust.
Using the 529 plan
For most people, 529 plans are the most optimal way to save for education as you can use them for both K-12 private tuition and college expenses.
I’ve previously reviewed all the details of 529 plans here, so we’ll jump into strategies now.
529 plans fund through “gifts,” but you’re limited to $15,000 per year per spouse before impacting your lifetime estate exemption.
If you’re married, you can contribute a combined $30,000 per year into a child’s 529 plan.
Contributions can be invested in the stock market, all growth is tax-free, and qualified distributions for spending are also tax-free.
Additionally, you can “superfund” a 529 plan by contributing five years’ worth of gift-tax-exempted amounts in one contribution for a total of $75,000.
If you and a spouse both did this, you could contribute $150,000 per kid in one year!
Notice I said per kid, as the gift tax exemption is applicable for each beneficiary.
You have to be careful because once you superfund, any additional gifts in the subsequent five years count against your lifetime estate exemption.
Superfunding isn’t limited to parents. A set of grandparents can also contribute a combined $150,000 in one “super-funded” year!
While I’m not to the point of superfunding accounts, we are using the 529 strategy so our kid won’t have a mountain of student loan debt like I did.
529 Plans for multigenerational wealth
While it seems premature to think about funding college education for a potential grandchild when my child isn’t even one, the power of 50 years of compounding makes it relevant.
If you have multiple parties who can superfund accounts, it becomes even more relevant.
Let’s use the strategy of two couples (parents and grandparents) super funding a child’s 529 plan with $300,000. If this amount grew 7% per year over twenty years, the account would grow to $1.2 Million.
You’ll cover almost any combination of undergrad and medical school for your kids with that much money.
The $1.2 million doesn’t even include additional contributions over twenty years, which could continue to grow the account.
While individual states stop allowing contributions when the account tops $300,000 – $500,000, you can bypass that rule by opening up a 529 account in a different state.
You could keep doing this with more and more states, effectively eliminating the amount you can build up in 529 plans.
But why would you continue to build these massive 529 accounts?
The 529 plan allows you to change a beneficiary to a wide range of family members. So even though I can’t open up a 529 for my “grandchild” today, I can keep my son as a beneficiary until a grandchild comes around and then change.
This would allow us to superfund the account today, knowing multiple generations down the line could use it. There are drawbacks that I discussed in my previous 529 article if the money isn’t spent on education, but it can be worth the risk.
Another use of the 529 plan is to pay for K-12 private tuition, which you can use $10,000 per kid each year. If you’re able to superfund, this is a great opportunity to start using today.
This initial account you create could potentially pay for multiple generations down the line, assuming no changes in tax laws, of course.
There are some even crazier strategies to enhance these opportunities, but as with all these posts, make sure you consult professionals before jumping into them.
UTMA
The next strategy I’ve started for my young son is to set up his account to begin accumulating wealth, the Uniform Transfers to Minors Account (UTMA).
The UTMA is similar to the UGMA, but the UTMA has more flexibility with what you can pass within the account, so we’ll focus on it.
An UTMA is essentially a “custodial” account you can set up and manage for your kids without setting up a trust.
You can use an UTMA to transfer money, patents, royalties, real estate, fine art, and more to a minor. For our example, we’ll focus on moving cash and stock.
While the assets remain within your total estate until the minor’s age of majority (differs by state), there are tax advantages to transferring assets to a child.
An UTMA is a little bit scary because once my son turns the age of majority (I was able to select 21 for Utah), he gets the money. He’s not even one yet, so I can’t tell if he’s going to be responsible with it!
How to maximize the UTMA
There are some other things to know about the UTMA to optimize their value. The first is the Kiddie Tax.
The Kiddie Tax was put in place to ensure wealthy people weren’t just passing all assets to their kids to avoid paying taxes.
To prevent this, once unearned income derived from the child’s account reaches a certain amount, it’s taxed at the parent’s marginal (highest) tax rate.
For our example, the unearned income in the UTMA would include dividends and capital gains from stock. Dividends are recognized when paid, and capital gains occur upon sale of the stock.
For 2021, the “Kiddie Tax” laws begin to apply after $2,200 of unearned income. However, the first $1,100 is tax free and the second $1,100 is taxed at the child’s rate of 10%.
That doesn’t sound like much until you think about a $100,000 account that pays 2% in dividends would still stay under that amount.
Just as discussed before with the 529 plan, you need to stay under the $15,000 gift limit to avoid cutting into your lifetime estate exemption, but everything below that is free game.
Giving appreciated stock to UTMA
The most powerful strategy to maximize the benefits of the UTMA is to gift appreciated stock. I’m doing this for my son’s UTMA.
As long as you stay under the $15,000 gift tax limit, there aren’t any immediate impacts when gifting stock. The original cost basis does transfer, so eventually, the capital gains will get recognized.
Let’s walk through an example.
If you have Accenture stock from 2004 you purchased for less than $25/share as I did, you could transfer this stock to your child’s UTMA.
While the cost basis transfers over at the same $25/share, capital gains aren’t taxed until the stock is sold within the UTMA.
You’ve effectively avoided paying your capital gains rate by transferring it to the UTMA, and now you can strategically sell within the UTMA to avoid the Kiddie tax.
Going back to our example, if you gifted $15,000 of Accenture stock, you could give around 60 shares @ $250 with a cost basis of $1,500 ($25 x 60).
You could then sell nine shares (9 x ($250-$20) = $2,070) this year to stay under the $2,200 in capital gains in the UTMA and avoid any Kiddie taxes. There would be a $110 tax bill based on the 10% child tax.
This allows you to avoid most capital gains tax, and then you could reinvest the money.
It’s important to stay under $2,200, so it doesn’t start getting taxed at your marginal rate. You’d also have to factor in Accenture’s dividend, which would also increase the unearned income.
Drawbacks of the UTMA
The first downside is the UTMA is an asset that counts against income-based college grants. This won’t impact most Accenture MDs anyway due to total compensation, but it’s something to know.
Another impact is that once you transfer cash or stock to the UTMA, it’s irrevocable. It now belongs to the kid, and they receive it automatically with no constraints at the age of majority (usually 18 or 21).
You may already have an 18-year-old. Are they responsible enough to receive this unconstrained money? It’s a risk!
Irrevocable Trust
An Irrevocable Trust is the last strategy to consider when working towards effectively paying for tuition and passing multigenerational wealth.
We’ll quickly cover this one as you should work with an estate attorney and CPA if you’re going down this route.
The Irrevocable Trust is a separate legal entity that you transfer assets into with specific rules. As the name implies, once you take this action, there’s no going back.
The advantage of the irrevocable trust is it allows you to lower your total estate value and avoid an estate tax. The trust isn’t considered a gift either, so you don’t have to worry about limitations.
Taxes are assessed based on the trust tax rates, which are much more aggressive than personal tax rates. Because of this, it’s usually not advantageous to use this trust as a way to avoid taxes.
The irrevocable trust is different than the revocable trust, which you need if you don’t have it already (we can talk about this later).
Let’s leave this one here for now and know that in most cases, the irrevocable trust is a tool to use later in life to avoid estate taxes, but it’s not great for our immediate objectives.
As you can see, there are multiple strategies to consider when planning for education expenses and to pass down multigenerational wealth.
I’ve started using these strategies today to enjoy the magic of compounding and help set up my child for success. While we never know what will happen in the future, I prefer to err on the side of over-preparedness when I can.
If you’ve read this far and your brain hasn’t exploded yet, congratulations. This is highly complex stuff, and you should work with a professional if you’re considering any of these approaches.
