Financial Independence and Legacy Planning Through Lifetime Gifting

In this video, Matt Blocki and Chris Pavcic discuss the complexities of financial planning for retirees, particularly the balance between achieving financial independence and leaving a legacy for their children. They explore the philosophy behind financial security and the importance of controlling spending rates to build a substantial nest egg, highlighting the uncertainties of longevity and potential healthcare expenses. The discussion then transitions to the strategy of lifetime gifting as a means to efficiently pass on wealth to heirs while still living, leveraging annual gift limits to maximize tax savings and estate planning benefits.

Matt and Chris emphasize the psychological and educational aspects of lifetime gifting, advocating for proactive involvement in guiding beneficiaries’ financial decisions and nurturing family relationships. Through insightful analysis and practical examples, they underscore the significance of starting lifetime gifting, regardless of estate size, as a means to impart values, provide support, and foster financial literacy among loved ones.

Video Transcript

Chris, one of the discussions we always have with our retired clients is how much, you know, what’s basically the philosophy between financial independence, typically a ten out of ten importance, financially secure ten out of ten importance, but then the importance of leaving money behind their kids. We hear it all over the map and some of the paradoxes that exist in financial planning. If you want financial security, being at a ten out of ten, that means controlling spending rates and probably having a significant nest egg when you pass, because you don’t know how long you’re going to live, you don’t know if a healthcare event is going to occur, et cetera.


So with that being said, someone that wants to stay financially secure if they’re going to have a legacy pass one of the questions then becomes, what’s the most efficient way to do that? Should we do it when we pass? Should it be a trust or should we start doing it during our life? And we’re big proponents of lifetime gifting. So gifting to your heirs while you’re still living within certain limits. So give us some of the pros and considerations that we should be. Yeah.


For lifetime gifting, first thing to be aware of, there’s annual IR’s limits that come into play. So for this year, it’s 18,000 that you can give to any individual, tax free. So this could be anybody, not just family members, like how we’re talking about gifting to kids, but still relevant. So say you’re a married couple, you have one kid. You could each do 18 and 18 for 36 total this year. So that doesn’t mean from a tax standpoint that the kid would owe any income tax on receiving the money. But for gift purposes, if you go over that limit, you have to file a form with the IR’s to document that.


Absolutely. So that 18,000. Just to put it in perspective, if you have three kids, so technically, if you’re a married couple, you have three kids, we can gift 18 per year per kid per spouse. So that’d be 18,000 for three kids times two spouses. So I’m just doing some really quick math. That’d be $108,000 a year you could technically get off your balance sheet. Now, for someone that’s super well off in, you know, 2026, the estate planning limits federally go down. So each spouse will have approximately about 7 million that they can pass on tax free. So let’s say someone’s above as a couple of 14 million every year they do this, they’re saving for they’re going to save, you know, essentially 40% of that number. So 43,200 a year in tax savings.


And then Pennsylvania, there’s an additional 4.5% when you pass money at death for anything. And essentially, there’s a couple exceptions. Life insurance is one of those. So for someone really well off, it’s 44.5%. And for someone that’s not as well off, you know, some of the discussions are more psychological. So if you know you’re worth a couple million dollars, you don’t have to worry about avoiding federal taxes when you pass. Typically, they’re all Pennsylvania inheritance tax, which are 4.5% for kids, 12% for siblings, 15% for grandkids. So you avoid that if you complete the gifts while you’re living. You also avoid other concerns, such as probate, some privacy concerns of court documents. You can also establish a revocable trust to elude some of those. But the biggest thing, from our perspective, is money can magnify who you really are.


And so passing the values that you have of how do you accumulate this money? How do you expect the money to be used? Making sure your children have the right education and wisdom and actually being able to coach and mentor them while you’re living, with how to use that money and how to invest it, and then seeing how they respond to it. Because once you’re not here, you don’t have that ability to have those tough conversations anymore. But as long as you’re here, your ability to have those tough conversations is right in the forefront. And then, based upon how you see them act, will hopefully be a piggyback on how you establish your estate planning documents. You know, how much access do you want them to have if they inherit? A million dollars each. How much access do you want?


How much protection do you want? Are they in a good marriage or not? Do you want that to go into trust, where it stays in the bloodline? But lifetime giftings, even if it’s small, this could be helping them fund a Roth IRA. It could be helping them max out their 401k by gifting them cash. It could be establishing 529 plans for their kids. Or if you have grandkids, all within these limits, whether you have a huge estate or not, if you’re going to pass something on, we highly recommend starting to test out lifetime gifting. It can improve relationships, and you can really watch your kids enjoy it, probably when they need it most, because they’re going to need a lot more now than 20 years from now, once their student loans are gone. And once they’re more established.


Any other closing thoughts on lifetime gifting?


No. I think the biggest thing you hit on it. What we emphasize is, like, the educational aspect of being able to teach your kids or whoever you’re giving the money to, whoever your beneficiaries are, how you accumulated it, and just be there throughout that process. Versus a lump sum just leaves more room for error.

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