How To Avoid Costly Mistakes When Transferring Wealth Pt.2

Given the high number of viewers who found this topic impactful, as well as the nuance that comes with it, we decided to make a Pt.2. In this episode of The Wealth Cafe, we dive even deeper into the subject of passing wealth on, this time as it pertains to parents and children. As we discussed in the previous episode, over $54 trillion of wealth is about to be transferred and most people are ill-prepared, whether it be knowledge of IRS rules or guidelines when it comes to timing. That’s why we’re here! We at The Wealth Cafe want to make sure that your wealth transfers go as smoothly as possible, so your loved ones can avoid tax pitfalls, family strife, and assure your legacy lives on! 

What we’ll cover:

✅ How to transfer wealth to children.

✅ Best practices when trying to move wealth tax-free. 

✅ Steps to prepare for the inevitable.

✅ Real-life examples. 

The great wealth transfer isn’t a future event; it’s happening as we speak. The women who are most prepared and approach estate and legacy planning with their end goals in mind will be the ones who ‘s wealth will be passed on successfully for generations to come! We highly encourage you to schedule time with your financial team to properly plan, so that the wealth you’ve worked so hard to build doesn’t go to waste.

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Transcript

SPEAKER_00 0:15

Welcome back to another episode of the Wealth Cafe. I'm your host, Caroline Tannis, lead financial advisor and founder of Tannis Financial Group. Now, if you listened to last week's episode, you heard part one of our Great Wealth Transfer series. Now, in this episode, we covered the horizontal transfer, which was from spouse to spouse and the tax trap that catches most surviving wives or spouses completely off guard. And if you haven't heard it yet, I want to encourage you to go back and listen. It is one of the most important episodes that I've recorded this year alone. Today's going to be part two, and we are moving from horizontal to vertical. So it's no longer spouse to spouse, but maybe to your adult children or whoever you want to inherit your money after your spouse. Here is the number that frames everything that we are going to cover today. $100 trillion will pass from baby boomers and the older generations to their heirs between now and 2048. Gen X, many of your children, stand to inherit $39 trillion in the next 10 years alone. Millennials will receive around $46 trillion over the next 25 years. That is your money, and those are your children or the next generation. And here's the question I want you to sit with today. Are you confident that the way your wealth is currently structured will actually reach your children in the way that you intend for it to? Not the way that probate decides, not the way your beneficiary form that you filled out maybe 15 years ago decides. Not the way that a formula clause in a trust written before the $15 million exemption decides, but the actual way that you intend for it to. Because intention without structure, it's not a plan, it's a wish. And at your wealth level, a wish that's not good enough. So today's episode is about turning your intentions into a structure that actually delivers what you designed. Let me walk you through the three ways wealth actually passes from parents to their adult children. Most people have a vague picture of this, and the difference between vague and precise can be meaningful, sometimes to the tune of millions of dollars. Method number one, and this is when you have an outright inheritance through your estate. This is the picture that most people have. You pass away, your estate goes through probate or trust administration, and assets are distributed to your children. Simple in concept, however, in practice, significant estates, probate can actually take 12 to 18 months or more. And it's public and it's one that can be contested. And it all happens, unfortunately, after you're gone, meaning that you have no visibility into how money is received or how it even lands in your beneficiary's hands. Method number two is lifetime gifting. The annual exclusion for 2026 is $19,000 per recipient or $38,000 per recipient for married couples filing and gifting together. Now you can gift that amount directly to your children or grandchildren every year without filing a gift tax return and without ever touching your lifetime gift exemption. A married couple who is gifting $38,000 per year to two adult children over a decade transfers about $760,000 out of their estate completely tax-free. That's not nothing. That's a sizable amount. For larger transfers, your $15 million lifetime exemption is available, but every taxable gift above that annual exclusion reduces the exemption dollar for dollar. Understanding how your gifting history interacts with your remaining exemption is an important part of the current financial planning picture. Method number three, this is for trust structures. This is where planning gets sophisticated. Trusts will allow you to transfer wealth, but with conditions, with protections, with tax efficiency, and with a degree of control that outright inheritance simply cannot provide. For most women at your wealth level, at least one trust structure may have a right place inside of your plan. Which one depends on your specific goals? And that's a conversation worth having with your estate attorney and financial advisor this year. I want to be direct about the three most common ways parent-to-child wealth transfers go wrong, because knowing what breaks is the fastest path to making sure that your specific situation doesn't have any of these issues. The first one is that your estate plan was never even updated. I have said this in other episodes, and I will keep saying it because it is that important. If your will or trust was written before 2025, especially if it was written with a formula clause tied to the federal exemption amount, your documents now may be directing different amounts to different beneficiaries than you ever intended. Under the new $15 million exemption, those clauses produce different outcomes than they did when they were drafted. The document is doing exactly what it says. It's doing, maybe not though, what you intend for it to. This is a fixable problem, but only if you take a look and review these documents with your attorney. Second, is that the children are not prepared. This is a conversation that most wealthy parents never have, and it is one of the most consequential gaps that I see when it comes to family wealth planning. Research consistently shows that 70% of wealth transfers fail by the second generation, 90% by the third. The failure is almost never about legal structure, but it is about the human preparation. Adult children who receive significant inheritance without context, without understanding of the value behind the wealth without an exposure to how it was built, they are statistically far more likely to make all of that money disappear. Preparation does not mean a lecture, it means an actual adult conversation. It's about the values that create the wealth, about what you hope the inheritance will and won't do for your children's lives, no matter what age they are. And it's about responsibilities that come with that form of money and that amount of money. Those conversations, they're uncomfortable for a lot of families, but they are also essential and better to do now when you have the time. Third is the tax picture was never modeled from the child's perspective. A $2 million inherited IRA is not the same as a $2 million taxable brokerage account after taxes. Those two assets have a very different value in your child's hands depending on what they earn, what tax bracket they are in, and also when they take those distributions. The Secure Act actually changed the rules on inherited IRAs significantly. Now, for most non-spouse beneficiaries, meaning your adult children in this situation, they are now required to fully distribute an inherited IRA within 10 years of your death. If you were already taking required minimum distributions when you passed, your children must also take annual distributions in years one through nine and then zero out that account by the end of those 10 years. This means your children could be recognizing a significant amount of ordinary income during their peak earning years and paying taxes at their higher marginal rate than you ever intended for them to. Understanding the after tax value of what your children are inheriting and structuring your estate to account for those, this is planning at a level that your situation actually deserves. One more dimension that is very important in the year 2026. If you've listened to our recent episode on the estate tax exemption, you heard me explain why the permanent doesn't actually mean and what the headline sounds like around the estate tax exemption. Congress can change that number at any time. A future administration, a future Congress, they could have a very different exemption landscape and different goals and what they want to see. Which means right now, with a $15 million exemption per person, it is the most favorable transfer window in modern history. The families who are using this window intentionally with GRATS and slats, dynasty trust, and strategic lifetime gifting, they are potentially moving millions to the next generation in a way that will be protected even if that $15 million rule changes. That is a planning conversation that should be happening this year right now. And the outline of that conversation starts with today's episode. I want to tell you about a story of two sisters. The details have been changed in order to protect identities, but this is a dynamic that I have watched play out in multiple families that I have worked with and stories of other advisors. A woman, I'll call her Margaret, passed away at 79. She had built significant wealth over her lifetime through a successful series of businesses, her real estate portfolio, and substantial investment accounts. She had two daughters who are both in their early 50s, both incredibly intelligent women and accomplished in their own careers. The older daughter, Karen, had been invited into a conversation about the family's finances for years. Margaret had taken her to her advisor meetings, and she knew the estate plan. She understood the values behind the money. She also got a feel for the frugality that was built into it and the risk that it had taken to grow to that amount and the intention behind how it was structured. She wasn't surprised by anything that she inherited. She was strategically prepared. Now, the younger daughter, on the other hand, Lisa, had been left out of these conversations. It wasn't intentional, but because Margaret had always assumed that there would be more time, Lisa received the same inheritance that Karen did. They got equal shares, and it was exactly as planned, but she didn't have the context. She didn't know the estate plan. She had never met that advisor either. So she didn't understand why certain assets were structured the way that she were. Now, within 18 months, Lisa had liquidated the entire investment portfolio, which had triggered a significant tax event that no one had modeled, and it made two larger financial decisions based on advice from people who they didn't understand her full financial picture. Some of the wealth that she received was gone before she even had a chance to realize what she actually had been given. Karen's fine. She is stewarding her inheritance thoughtfully, and she is continuing what her mother had built and intended for that money. Lisa's also okay, but she did have real quantifiable damage that she received a very short window of time because of when she was gifted that money. Not because she was careless, but she was just simply unprepared and didn't see the larger financial picture. When I think about Margaret, I think about the conversations that she truly meant to have, but just ran out of time for. Today's episode is not about running out of time. As we wrap up today's episode, I have three actions that I want us to go through. Action number one is update your estate documents this year. If your will, trust, or any estate planning documents were written before 2025, schedule a review with your state attorney. And the thing to ask them specifically is does the language of my existing documents still produce the outcome I intend to under this new $15 million exemption? You should also understand how the distribution of after tax value to your children and what they're really going to receive. This includes your inherited IRAs under that 10-year distribution rule that the Secure Act changed. Action number two is start a family conversation. I know this is one that is harder than scheduling the legal meeting, but it may be the most important action that I'm going to share in this episode. Have a real conversation with your children about financial values, your intentions, and even your expectations for how this wealth is meant to function in their lives. You don't have to share exact numbers, though I'd encourage you to think carefully about why not, if that's your instinct. Is it that you should be protecting things in a different manner? But they should understand the spirit behind what they are inheriting, what it costs to build, and what you hope it does for them in their lives and in their future. What you are specifically not hoping for as well is a great thing to share. And that context and that difference is what sustains wealth over what dissolves it. Action three, ask your financial advisor to model out the transfer from your child's perspective. What are they going to actually receive after tax and how will the inherited IRA affect their income over the 10-year distribution window? And is there more of a tax-efficient structure for how they should inherit based on who they are, what they earn, and where they are at this point in their lives? This analysis can change. And as estate planning conversations are happening, you should include them as well because this is one of the most valuable conversations that you will have with your advisory team this year and one to keep having into the future. The Great Wealth Transfer, it is not a future event. It is happening right now. And the women who are prepared and approach it with intention, they are going to the ones that are going to have the right structures and they are prepared for the next generation and they are going to have their tax picture modeled out from every different angle. And having these conversations now and building a plan that is designed for you is essential. If you haven't already listened to part one of the spouse-to-spouse transfer, go back and give that a listen. It is an important episode. And hit follow so you never miss one of our future episodes. These are the conversations that should be happening with every woman at your level and in your circle. And we are dropping new episodes every single week. If this is a conversation your advisor isn't having with you or you don't feel comfortable having with them, it's time to get a second opinion and take a second look. So head over to tannisfingroup.com slash contact to apply for a complimentary intro call so we can do this planning now before it's too late. And if there is somebody in your life that you want to share this episode with because you know that they could benefit, make sure you do so and help educate them so they also don't become one of the statistics. Thank you so much for listening into this episode of the Wealth Cafe. And I look forward to seeing you again next week for another episode.