Avoid These 5 Pitfalls When Transferring Your Wealth to Your Kids

You’ve invested, managed your money wisely and passing along an inheritance to your children may be a reality. However, many people mess this part up – badly.

Today, we’ll discuss 5 mistakes to avoid when transferring wealth to children.

Avoid These 5 Pitfalls When Transferring Your Wealth to Your Kids

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Full transcript:


Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
You’ve invested, manage your money wisely. And passing along an inheritance to your children is likely a reality. But this is where people mess it up big time. Today, we’re going to discuss five mistakes to avoid when transferring wealth to your children. Hey there, it’s Alex and Anthony from One Degree Advisors, and we help you gain confidence in your retirement. So Anthony, aiming to have a successful retirement is a common goal. And people work hard at this. And this success can be rewarding, but honestly, then what? Having an estate plan in place is a good step. But it’s not enough to just simply have legal documents in place. So today, we want to talk about five mistakes to avoid when it comes to transferring wealth to the next generation.

Anthony Saffer 0:48
That’s right. And people work so hard to get towards retirement and get through retirement successfully. And then what’s leftover really just becomes an afterthought, and it gets less attention. And then the second thing that often happens is people focus on the legal documents, which is good, but they become overly complicated. And there are many things that get neglected.

Alex Okugawa 1:07
Now, again, today, we’re gonna go over five mistakes. These are five of the most common mistakes that we found that if folks have other things that they found in their own experiences in life, we’d definitely like to know in the comments down below. But let’s get into it. The first mistake we have here is simply giving too much.

Anthony Saffer 1:24
That’s right. And money is a tool, it can be used for good or bad. The Heritage Institute did a deep-dive study on inheritances. And they found that 90% of traditional inheritances fail within the first or second generation. What stood out from this study, in terms of what made them fail was number one a lack of knowledge or a lack of preparedness by the next generation. And so children need to be prepared to handle money. It’s obviously better if you can train your children when they’re younger, to manage money wisely. But even as they grow to be adults, encouraging them to work with a financial advisor, and get their own house in order can have a tremendous effect, when they do inherit some assets.

Alex Okugawa 2:07
And all the money doesn’t necessarily have to go to your children. I mean, you may choose to give some of that money to charity. And that can help you determine the correct amount, right, the correct amount to go to your children that is going to help them in life and not be a detriment. So mistake number two here is telling your kids how much they’ll inherit.

Anthony Saffer 2:27
Yeah, this is a bit delicate. I talked to our friend, Stacy DenHerder, who’s an estate planning attorney. And some of the comments she gave back were really good. I mean, when you talk too much about the amount that you’re giving you really get into the balances. I mean, it can remove the incentive for them to work. The amount could change, you start to spend money, whatever it means the market goes down. Yeah, I mean, there are all kinds of things there. As parents, we could change our minds in terms of what we’re giving, perhaps we want to we do want to give more to charity at some point, like you said, when you create those expectations, then that’s where the misalignment can come. Not only can it sow seeds of doubt, but there’s often litigation that then creeps into an estate because those expectations are misaligned.

Alex Okugawa 3:14
And Stacy did say that when a family is working through like these transparent legacy transitions, it can make sense to become more transparent in that process. But it has to be a purposeful approach. And that’s where sometimes we can help and come in, I mean, we’re not estate planning attorneys, we’re not going to draft the legal documents, but we do have a process called family legacy planning. And that helps facilitate those conversations to make sure that the next generation is prepared. Okay, let’s go into mistake number three here, which is simply being unorganized.

Anthony Saffer 3:45
That’s right so pretend you walk into a business and you’re there to shop or be a customer. CEO walks out of the corner office and says you’re in charge now take over this business. I mean, you may know a little bit about what they do maybe even how they do it some of your work experiences perhaps could trend over to where you’re able to help but trying to do that would be such a difficult process, and yet that’s what we ask people to do, often children, is we pass away than children walk into the situation and they have no idea what’s going on with their finances. And so it becomes really difficult well what bills do I pay where are they even banking you know where do they have their accounts?

Alex Okugawa 4:27
See that so often the next generation has no idea even what Mom and Dad have or had or where it’s located and then they’ll get some random pieces of documents, I don’t remember seeing this bank account or I didn’t know dad had an account here and you just start seeing all this stuff come in.

Anthony Saffer 4:42
Yeah so, checking the legal box. Do I have a will a trust and an estate plan that’s good? But often just creating a summary that says here’s my financial life on paper, where to go for things can be really important now with our clients, we give them a personal financial website. It helps to get everything organized and a lot of our clients, they tell us, you know, I’ve given your business card just to my children, something happens to me go talk with One Degree and they’ll help you organize it.

Alex Okugawa 5:08
Now, again, let’s go into Mistake number four, which is overpaying taxes. Now, the lifetime estate tax exclusion before you end up paying estate taxes is over $12 million a person at least that’s what the law currently is. And this could change. Well, we’ll see if that potentially changes with a sunset here at the end of 2025. But you should definitely have a plan for this. And you don’t want to get hammered with taxes. Now the majority of people. If it’s not the estate tax, that’s going to be the issue. It’s going to be income taxes, yeah, which is going to be an issue

Anthony Saffer 5:44
and people ignore this side of the planning because certain assets pass tax-free, they have just a good tax character as they’re passed along. Something like an IRA, I pass that to my children, well, it can still be taxable to them. Yep. So when you sit down, you plan everything you say, Well, okay, I want like life insurance, or maybe real estate that has a step up in cost basis, to go to children, if I am giving to charity, perhaps you give the IRA which is taxable, to charity, because they can then sell it tax-free, whereas your kids would pay tax.

Alex Okugawa 6:13
That’s where being intentional is just so important. And lastly, we have Mistake number five, which is really emphasizing money over the relationship when it comes to leaving an inheritance.

Anthony Saffer 6:25
That’s right. So we talked about how money can be harmful we, unfortunately, get to see where money just breaks relationships. So whether that’s parents to children, sibling to sibling, communication really becomes quite key here. And making sure that you get the proper counsel this or good objective advice can help you think through some of these things and then be able to communicate the right things with your children slowly.

Alex Okugawa 6:47
And we did recently make a video on how to gift money to your children or the next generation without having to pay any tax. We’ve recently made that video folks and watch that above. Once again, this is Alex Okugawa with One Degree Advisors and if you’d like to learn how we can help you with your retirement and passing assets and a legacy to the next generation successfully, visit our website at onedegreeadvisors.com/getstarted/

Transcribed by https://otter.ai

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