A petite, newly widowed woman walked into my office. She was distraught, having recently lost her husband at the age of 58. She and her husband had worked hard to amass everything they had, which was quite substantial. They had three children of varying degrees of financial independence. One had married a broker, whom the widow did not quite trust, one had joined a very religious order which had her concerned, and the youngest of her children was pregnant and expecting her first child.

The first words out of my client’s mouth were, “Under no circumstances do I want my children to know how much I am worth. And, more importantly, I want to leave almost everything except for small bequests to charity.”

Now, while we’ve heard this plenty of times before, never when the grantor was worth so much money. We agreed to a conservative asset allocation for her investments and looked to her estate plan. We finally convinced her, as she was so young, to not tie up all the money immediately to charity, but wait and see over the next few years how things turned out.

Ten years later, she still laughs about that first meeting with us. Now she has seven grandkids, and her estate has more than doubled, even with a hefty position in bonds. (Timing of this original investment could not have been better!) But she still did not want her kids or even more so her sons and daughter in law to know about her estate. However, she wanted to help them, without giving them a lion’s share now.

There are many ways to indirectly offer aid to children, and see the benefit in a grantor’s lifetime, without making direct gifts to the kids.

The first thing that comes to mind is gifting in a way that removes money from their taxable estate (especially for estates over two million), and yet does not count toward their annual gifting exclusion. Anyone can give anyone $12,000 this year, and it is a tax free gift, not included in their lifetime gifting exclusion. If you gift more than that, you run into some planning concerns as well as having a reporting obligation. This is per person, so a couple can give each child $24,000, or $12,000 each. Current law lets one give away $1,000,000 without paying a gift tax in their lifetime under current law.

Another way to help children financially without giving money to them directly is to pay their tuition or medical bills. As long as the bill and tuition are paid directly to the provider, they count the same way as above, and not a a gift.

Or, start a 529 plan for children or grandchildren. These plans are the next best things to sliced bread (like Roths!) and allow a grantor to fund them with a hefty start if wanted (usually up north of $200,000 if they so choose) and add each year. These replaced the old education IRAs and can be used to offset books, school equipment, tuition, and housing AND they have portability. For example, if it is originally assigned to one grandchild and that child is a genius and gets full scholarships and doesn’t need the plan for tuition, it can be reassigned by the grantor at no penalty to someone else (even to the grantor herself if she decided to go back to school). These can go on multi generationally also, and grow with no tax due on growth or income when the money is pulled out for educational use (like a Roth). Many states have these plans, and if an in-state plan is chosen, up to $3000 contributed annually can be directly applied against state income tax. The grantor does remain in charge and has revocable powers to change beneficiary, thus these do remain in the estate of the grantor. These don’t have to be used for college alone either, but can also be used for any private schooling along the way.

We also suggested that the client, who was charitably inclined, have a piece of the pie go to a foundation and assign it to a cause that she had an interest in, with her children in charge of that part of the gift. Many foundations, such as the Milwaukee Foundation, will allow this, and this enables the children to take further interest in charity and seeing through their mother’s wishes.

Of course, some people say, “I can’t take it with me, I might as well see my children enjoy it.” But before a parent goes off half cocked about to give away their hard earned money on a child’s dream, there should be a heart to heart about accountability. Many parents say, “If that pet salon/book store does not take off, they can just pay me back.” You know the drill, it doesn’t work and the parent forgives the debt. That has just become a gift. With consequences. Should a parent want to make a loan, or sell real estate to a child, there should be no “deals” or that too is a gift. It must be done “at arms length” which means at market value.

One final issue we see is a parent trying to treat all fairly and equally. Once a grantor starts giving money to one and not the others, if their mindset is fairness, it can complicate planning. But gifting annually, equally, to children and even grandchildren outright to bring down an estate is a very equitable way for planning. See what they do with the money, if you don’t approve, maybe skip a year, or give less. If there is one child who, for whatever reason, should not receive the cash currently, give it to a trust in their name.

After all, it’s the grantor’s money, but no one likes to give around 50% upon death to the IRS when it could have been given with good, proactive planning, to their families.

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