DISCLAIMER: Any financial advice I give on this blog is my opinion based on 30 years of working as a finance professional. Before making any financial decision do as much research as you can to make an informed decision.
So in the U.S. we have an extremely complicated tax code, its frankly ridiculous but that’s another blog post entirely. One of the issues the more fortunate of us face is how do we leave our money to our offspring without getting killed on taxes. This doesn’t apply exclusively to the rich either. Middle class Americans who have any amount of money face taxation on their net assets. The older you get the less you actually need your assets to survive. Specifically, there comes a point in your life where you have enough money that generates income that you will not have to compromise your principal.
Again, this isn’t for everyone… Many people live paycheck to paycheck but there are some of us who have a paid for house, a good chunk of change in our 401K’s and are debt free. We aren’t multi-millionaires but we do have money in excess of necessities. You may ask yourself “well Karac, why can’t I just spend it on all those things I wanted to do in retirement?” I would say to you “what things?”
There is this myth that once you retire there is glut of items or travel that you are going to purchase. You likely aren’t going to buy a new car, a 2nd house, travel 1st class. I mean you may, but average middle class people don’t do this regularly in retirement. Once in a while? Yes. So we are sitting on cash, when we die you aren’t going to care what your 401K balance is, your heir’s or the government WILL care because they benefit from it.
This is when all sorts of tax issues can happen and depending on the family dynamic horrible drama. There is an option and that is gifting money to your heirs now prior to your death. In 2021 the U.S. allows for a Gift Tax Exclusion of 15K per recipient. So if you had 150K you could gift 15K to 10 people and not have any tax implications. There is a life time limit to how much you can gift, its 11.7 mil which most of us are never going to hit.
So the tip: When you are starting your retirement planning, it may be prudent to calculate annual gifts to your heirs. It’s likely that the money now will help them more than money later as they can then take the gift and use it to supplement their current income. 15K is a lot of money. If you retire at 62 and live the average age (in the U.S.) of 82-84 (let’s say 83) that’s 21 years. 15K a year for 21 years = $315,000.00 that your heirs are not going to inherit and pay associated taxes on.
Again this is an advanced finance/retirement tip. You should be doing a lot of research and planning when you approach retirement. For a good article on Gift’s and Gift Taxes check out the article here.
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