Podcast Summary: The Practical Planner

Episode: How to Financially Plan for Your Children’s Future
Date: October 24, 2024
Hosts: Thomas Coldman & Dave Haughton
Podcast by: wealth.com

Episode Overview

This episode reimagines estate planning with a focus on actionable strategies for financially planning for children’s futures. Hosts Thomas Coldman and Dave Haughton break down the pros and cons of different accounts and planning vehicles available to parents and advisors, emphasizing flexibility, liquidity, and fit for individual circumstances. While rooted in estate planning, the conversation is highly practical, arming advisors with talking points and insight to guide clients of varying means.

Key Discussion Points & Insights

1. The Core Principle: Flexibility First

• Flexibility & Liquidity as Priorities ([02:05])
  • Planning for the future is unpredictable. No one can be certain how mature their children will be when they come of age.
  • Thomas: “I can tell you the people that have liquidity and they have flexibility enjoy their financial lives a lot more than people, regardless of their net worth, that lack flexibility and lack liquidity.”

2. UTMA/UGMA Accounts: The Double-Edged Sword

• Nature & Drawbacks of UTMAs ([02:43]–[05:52])
  • Completed gift to the minor: irrevocable, and out of parental control when the child reaches 18 or 21.
  • Dave: “Once they reach that age determination, which is usually 21, that's their money. There's nothing you can do about it.” ([03:20])
  • Risk: Children might not be ready for a sudden financial windfall.
  • Thomas: “...if you’re only really able to do one thing right and you’re picking between the types of accounts, UTMA for me falls last on the list.” ([05:09])
• When UTMA Makes Sense
  • Higher net worth families using UTMAs as one of several vehicles.
  • Unique circumstances: kids have earned money (child actors, personal injury awards).

3. 529 Plans: More Than Just College Savings

• Why Advisors Often Prefer 529s ([05:52]–[10:48])
  • Tax deferred growth; tax-free distributions for qualified education expenses.
  • Ownership and beneficiary flexibility: “You are still the owner of that account. So you can change the beneficiary if you want.” ([05:52], Dave)
  • New law allows unused 529 money to be rolled over to a Roth IRA for the beneficiary (within limits).
  • Avoiding Common Misconceptions:
    • Not just about the state tax deduction—biggest value is long-term growth and gains shielded from taxes.
    • 529s cover a range of expenses: private K-12, trade school, some student loans.
    • Thomas: “If you look at most states… you put in $150,000 and it’s worth $300,000… you just saved $50,000 on taxes by using the 529.” ([09:14])

4. Taxable Brokerage Accounts in Parent’s Name

• Ultimate Flexibility ([11:19])
  • No restrictions on use, parents retain control, and can disburse (or not) funds as life and maturity dictate.
  • Only subject to capital gains tax on growth.
  • Dave: Advises using revocable trust or TOD (Transfer on Death) designations to ensure assets get to intended beneficiary and potentially step-up in basis at death. ([12:09])
  • Thomas: “If you need the money, it’s available for you. Two, if you don’t want to give it to them at 18 or 21, you don’t have to.” ([11:48])

5. Trusts vs. TOD (Transfer on Death)

• Both Avoid Probate, But… ([12:52]–[14:12])
  • Trusts have advantages in managing assets during incapacity (trustee steps in seamlessly).
  • Some nuance around how beneficiary designations interact with trusts for estate/tax planning.
  • Dave: “It's sometimes a little bit more difficult to get banks to accept powers of attorney… that can be a little bit more smooth.” ([13:28])

6. Strategic Gifting: Tuition & Medical Payments

• Power of Direct Payments ([14:12]–[16:26])
  • Pay tuition or medical expenses directly to providers: unlimited gifts that do not count against annual or lifetime exemption.
  • Superfunding 529s must be reported and affects exemption, but direct payment does not.
  • Consider children’s differing tax brackets and state of residency when planning inheritances (e.g., IRAs to the lower-earner child).

7. Family Loans: “Be the Bank”

• Intra-family Lending as Support ([17:16]–[18:56])
  • Provide down payment or finance a home purchase for a child at low Applicable Federal Rates (AFR).
  • Must follow IRS formalities to avoid gifts: written agreements, proper interest, documentation.
  • Dave: “To the extent that you don’t charge that minimum interest rate, the IRS is actually going to deem it a gift.” ([18:36])
  • Accelerate support in early adulthood versus bequeathing assets later in life.

8. Trusts as Advanced Tools

• Utilizing Trusts When Appropriate ([18:56])
  • Set up trusts for specific purposes (e.g., QSP stacking), lifetime gifting, use of estate exemption.
  • Advanced planning often best for higher net worth families or unique needs.

9. Major Mistakes and Cautions

• UTMA Accounts at Age of Majority
  • Once a child hits the threshold age, assets become theirs, and last-minute solutions are limited.
  • Dave: “You’re in a tough situation because you don’t have a lot of time… it’s really something that you should’ve thought about when you funded the account.” ([19:47])
  • Some workaround: Use UTMA to pay for qualified child expenses before the age threshold.

Notable Quotes & Memorable Moments

• On Flexibility in Planning:
  • Thomas: “Liquidity and flexibility—people with those enjoy their financial lives much more than people who lack them.” ([02:19])
• On UTMA Downsides:
  • Dave: “Once they reach that age determination… that's their money. There’s nothing you can do about it.” ([03:20])
  • Thomas: “UTMA for me falls last on the list.” ([05:09])
• On 529 Plan Superiority:
  • Thomas: “Avoiding capital gains is one of the biggest tax planning moves you can make.” ([09:36])
• On Using IRA/Tax Planning for Heirs:
  • Thomas: “The goal of you and your family and your generation should be how do we pay the least amount of taxes over all of our generation's lifetime?” ([17:00])

Timestamps for Important Segments

• [00:20] – Episode goal and why children’s planning matters
• [00:59] – Why flexibility is crucial for minor beneficiaries
• [02:43] – UTMA accounts: mechanics and warnings
• [04:15] – Real-world consequences of lack of flexibility
• [05:52] – 529 plans: flexibility, tax advantages, new features
• [09:14] – 529 plans: focus on capital gains avoidance
• [11:19] – Taxable accounts in parent’s name: pros and cons
• [12:52] – Trust vs. TOD designation: ensuring probate avoidance
• [14:12] – Gifting tuition/medical: best practices
• [15:40] – Strategic inheritance based on kids’ tax situations
• [17:16] – Family loans: how-to and compliance tips
• [19:47] – Dealing with UTMA accounts as children come of age
• [20:48] – Recap and blending strategies for unique family needs

Final Takeaways

• No one solution fits every family—balance flexibility, tax efficiency, and the unique needs of parents and children.
• Avoid irrevocable gifts unless absolutely sure; maintain control and options as long as possible.
• Blend multiple vehicles—529s, brokerage accounts, trusts, direct payments—to create a nimble and robust plan.
• Regularly revisit plans as circumstances or laws change.
• Work closely with your financial and estate planning team to ensure your strategy fits evolving goals.

For more practical tips and real-world estate planning scenarios, advisors are encouraged to subscribe and share their feedback with the hosts.