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Managing Risks, Gifting, and Legacy Planning

Transitioning wealth to the next generation requires a strategy.

By Nicole Wirick, CFP

An important component of financial planning analyzes one’s ability to achieve financial independence by determining if there is a high likelihood of achieving goals without depleting resources, based on attainable spending and savings targets.

Nicole Wirick

Nicole Wirick

Once this is accomplished, prudent planning dictates assessing risks that could derail the plan, such as a premature death, disability or long-term care event. Risk assessments are fluid, changing based on your needs, position in life, and situations.

Life insurance is often used as a tool to mitigate the risk of a premature death. The insurance replaces the stream of income the decedent would have earned over their lifetime as a means of providing for their loved ones.

Similarly, disability insurance is used as a tool to mitigate the risk of an accident or illness that prevents the ability to earn income. Both risks are reduced or eliminated as retirement approaches, since there is no longer a stream of income to protect.

At this point, the conversation often shifts to the risk of a long-term care event. With medical advances and an increased focus on health and wellness, Americans are generally living longer and have the desire to age in place whenever possible. A thoughtful plan models the possibility of a long-term care event and integrates the increasing costs over time.

Long-term care related expenses often increase at a rate higher than other goods and services. In fact, the average annual inflation rate for long-term care is about 3% - 5%. Regardless of whether insurance or self-insurance is considered, there should be a plan in place to address the possibility of such an event.

Gifting to the Next Generation

Once a financial independence analysis is completed and the aforementioned risks are properly assessed and mitigated, a great sense of comfort is often gained. Attention may then shift to planning for the next generation.

Transitioning wealth to children and grandchildren can be a complicated topic, but a simple and effective way to leverage this opportunity is to gift cash or appreciated stock. An individual can gift $15,000 to another individual in 2021 without any tax implication. Husband and wife who file a joint tax return can each gift $15,000 for a total of $30,000, which is called a split gift.

Those with sizable estates, high probability of financial success, and appropriately mitigated risk management may desire to transfer more than the allowed $15,000 per person per year. While there are several possible estate and legacy planning strategies to accomplish this goal, these solutions may be time consuming and costly to implement.

There are a few straightforward ways to give to the next generation, above and beyond the $15,000 per year limit. The Med-Ed Exclusion is one such opportunity. Internal Revenue Code Section 2503(e) excludes the direct payment of another person’s medical and educational expenses from federal gift taxes. That means someone can pay for another person’s tuition, as long as it’s paid directly to the institution, and still give $15,000 per year in addition to the tuition. The same is applicable for qualified medical expenses, so long as it’s paid directly to the provider.

Another opportunity to give in excess of the $15,000 gifting limit is to purchase a long-term care policy where the parent is the owner and pays the premiums directly to the insurance company, and an adult child is the insured party. Because parent and child are related, parent would have an insurable interest that would allow them to own the policy. When parent passes away, they can name the child as contingent owner to ensure the child gains control of the policy and the policy avoids probate.

It’s important to understand the ‘why’ behind this strategy:

  • As discussed earlier in this article, long term care is inflating at a rate higher than other goods and services. A $10,000 monthly long-term care expense today will cost over $33,000 per month in 25 years based on a 5% annual inflation assumption. 
  • When gifting cash or securities, a parent often has less control over how the funds are managed and spent. 
  • The opportunity to gift more without incurring taxes. No taxes are triggered because the parent is the owner of the policy and pays the premium. Parent is still able to give $15,000 to child in addition to paying the premium. 
  • It’s typically easier to qualify for long-term care insurance when you’re younger and likely heathier.

For those who are in a financial position to consider transitioning wealth to the next generation, this might be a strategy worth considering. Please meet with a qualified financial planner, insurance professional, and tax advisor to understand the specific implications as it relates to your situation.

About the author: Nicole Gopoian Wirick, JD, CFP®

Nicole Gopoian Wirick, JD, CFP®, is the founder and president of Prosperity Wealth Strategies in Birmingham, Michigan. Nicole is a fee-only financial planner who believes a successful advisory relationship involves compassionate conversations and planning tenacity.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.