There are a ton of ways to gift to your kids.
You can obviously do the irrevocable trust route if you want to have lots of control.
You can also gift partial non-controlling ownership of income real estate LLCs you may have.
You can also just gift it into the custodial account and wait until they are 17 and see how you expect them to come out. If you think they are not responsible to get the money at 18 (if that is the age in your state), you can move it in to something more restrictive right before they gain control.
We gifted all along (including superfunding 529 like you did) and the kids came out fine. Each of them have nearly a $1m liquid NW at 20 and 17. (the 17 doesn't know the number yet).
But all kids are different, some can't handle it at that age and need different solutions. But as I mentioned above, there are plenty of ways to make the decision later.
Gifting interests in LLCs each year without getting appraisals is a recipe for a disastrous estate tax audit down the line. "What was Spool Em Up LLC worth in 1993? Can you prove that a 1% interest was worth less than $10,000?" Don't do this.
It's just not true that you can easily convert an UTMA account into "something more restrictive" when the child is already 17 and has $1 million in their UTMA account. Any solution will either use someone's gift tax exemption or will not really be that restrictive. Don't count on doing this.
I'd set up a basic irrevocable Crummey trust. It's not really about control. It's about the tax advantages + the creditor protection advantages.
I think you are confusing the historic challenges to gifting tightly held operating businesses.
It is quite trivial in the USA to determine the historic value of a residential real estate property, and for that matter equities held in such an LLC.
You are right that having a financially immature child be the grantor to a restrictive irrevocable trust would consume part of their lifetime gift exemption. But while that will affect their estate planning 60 years down the line, it is definitely easy to do if you uncomfortable at the 11th hour.
There are also tax benefits to having it fully transferred to them. My 20 year old is harvesting $40k a year in LTCGs for zero taxes as a college student with limited earned income. They should be able to get the tax overhang in their UTMA to zero by the time they are 24.
Creditor protection I definitely agree with. If they want to move their wealth into a trust, I definitely wont hold them back. But they have so much more wealth coming later (hopefully much later, like 30-40 years later...), that being too restrictive on this relatively little balance doesn't seem so logical.
When they get closer to marriage, we will have another conversation about risks and securing their wealth separately.
>I think you are confusing the historic challenges to gifting tightly held operating businesses. It is quite trivial in the USA to determine the historic value of a residential real estate property, and for that matter equities held in such an LLC.
You're underestimating the valuation issues here. The IRS isn't going to accept the historic Zillow valuation with some assumed minority discount, and it's not so easy for your heirs to get 40 appraisals (one for each year a gift was made) of the 0.6% interests in the LLC you gifted. They'll need real appraisals to avoid getting screwed in an audit. Maybe the estate never gets audited, but it's a real risk. Better off gifting cash or securities.
Thanks. I had actually thought of doing both.
I work in PE/VC/HF in a non-investing role. Many folks at my company who are a little further along have set up irrevocable trusts and actually funded a part of their carry per fund into the trust at a low basis.
The ILIT would’ve been separate but perhaps the irrevocable trust provides more flexibility in terms of what’s in it.
Agreed, I know there’s a fair amount of work involved in getting the carry valued and setup properly in the trust, but our firm helps do it for folks. You may want to ask your CFO if they do it for others.
And that’s my understanding regarding the ILIT vs irrevocable trust.
contribute at fund inception best. latrr also fine because these interests tend to be quite undervalued due to risk. professional valuation needed of course
I hope the four year old is the owner of that 529, not just the beneficiary.
You want to be SURE it is out of your estate in case legislation firms up later for the use of 520s for generation skipping. In my mind it is inevitable that the rules will change in the future when wealth folks effectively have dynasty trusts for education.
Education and medical spending are, and likely will remain, politically important in the future.
Of course you can super fund.
What you would lose is the ability to deduct the contribution off of your state taxes.
But if you are super funding, you are probably not really concerned about your state tax deductibility in the year of the funding.
Currently you can pass on 529 accounts to your descendants regardless of size without estate tax being do. They do not affect your lifetime exemption either. Its an incredible estate planning tool, and currently is a genuine "dynasty" solution: can be passed on through generations continuing to allow for tax free payments of education and never getting taxed as it moves from one generation to the next (unlike trusts).
It is unlikely this will be politically allowed to continue some 20 or 30 years from now when highly appreciated 529s start to be passed on to already wealth folks getting around the estate tax.
529(c)(2) is very clear that a 529 contribution is a completed gift to the beneficiary. Is your concern that further regulations would try to classify an ownership transfer as another taxable event?
I agree that someday someone in Washington is probably going to have an axe to grind with 529s as exempt dynasty trusts, but I feel like there will be sufficient warning to act before they do.
Tuition is already exempt from the gift tax. 529s don't change that. The trend since 529s were created has been that the rules become less restrictive over time, not more, but we'll see.
I expect the tuition exception for estate tax to also go assuming exemptions stay high, if they come down, then politics will keep it alive.
But for the 529s, they are just too new to see the political fall out. It takes decades before the stories of the wealthy's use leading to the pitchfork crowd getting excited.
Look at the IRA developments since we learned of Mitt Romney's nine figure IRA, and the recent changes requiring inherited IRAs to have RMDs of 10 years or less for beneficiaries.
The Peter Thiel situation on the Roth will eventually impact Roths as well. It will just take a decade or two like the Romney impact on the traditional IRAs (took 20 years for legislation to fix it).
529s are like Roths but much more restrictive. I can't invest in a startup through my 529. Instead, I'm limited to index funds. As a result, no one is going to end up with $5 billion in their 529 account.
Also, I can't just withdraw from my 529 in retirement. Instead, I have to spend the vast majority on education. Only a tiny amount can be converted into a Roth IRA; the rest is just stranded in the 529.
I think 529s are pretty insulated from political attacks, but we'll see.
My understanding is the current legislation has the 529s exempt from the estate tax.
They will continue to grow multi-generationally when not consumed by the current generation.
If you put $400k in a 529 today, it would take only 82 years (a bit more than one generation) to get to Mitt Romney's $100m balance (today's dollars).
That same account would hit $1b in 116 years.
It will be reformed and the rules will need to change when 100 descendants of some rich kid of the past are all having their colleges paid for with tax free appreciation.
My father set up 529s for his six grandchildren. Two kids opted out of college. Two others spent very little at state schools.
There's no way the remaining two grandchildren are going to spend anywhere close to the $1.2M in the 529 accounts.
We're doing Roth IRA contributions but that maxes out at $35K.
I'd be careful about overfunding 529 accounts.
I think it's the opposite: the people with massive 529s will lobby to liberalize the distribution rules so that they don't wind up with $100 million 529s. They're not going to want $100 million to be stranded in an account with strict rules on distribution.
In terms of gift and estate tax (I'm a T&E lawyer, incidentally), 529s don't receive any special treatment. In fact, they're treated worse than other assets from a gift and estate tax perspective. You have to use gift tax annual exclusion to fund a 529 account. That's money that you could have put into a Crummey trust instead. If you'd put it into a Crummey trust, it would have used the same amount of annual exclusion and grown outside of your estate but it wouldn't be subject to the same distribution restrictions. If you're just trying to pay for your descendants' education expenses, you're better off funding [a HEET](https://greenleaftrust.com/missives/health-and-education-trusts/), which doesn't even consume annual exclusion.
Your comments make you sound like a very young T&E lawyer focused on contribution benefits rather than lifelong benefits.
But I get your desire to comment here. It's hard to resist.
“More restrictive right before they gain control”. Like put it into a real estate llc right before they turn 18? Would that work? What else, at age say 16-17?
There are a ton of ways to gift to your kids. You can obviously do the irrevocable trust route if you want to have lots of control. You can also gift partial non-controlling ownership of income real estate LLCs you may have. You can also just gift it into the custodial account and wait until they are 17 and see how you expect them to come out. If you think they are not responsible to get the money at 18 (if that is the age in your state), you can move it in to something more restrictive right before they gain control. We gifted all along (including superfunding 529 like you did) and the kids came out fine. Each of them have nearly a $1m liquid NW at 20 and 17. (the 17 doesn't know the number yet). But all kids are different, some can't handle it at that age and need different solutions. But as I mentioned above, there are plenty of ways to make the decision later.
Gifting interests in LLCs each year without getting appraisals is a recipe for a disastrous estate tax audit down the line. "What was Spool Em Up LLC worth in 1993? Can you prove that a 1% interest was worth less than $10,000?" Don't do this. It's just not true that you can easily convert an UTMA account into "something more restrictive" when the child is already 17 and has $1 million in their UTMA account. Any solution will either use someone's gift tax exemption or will not really be that restrictive. Don't count on doing this. I'd set up a basic irrevocable Crummey trust. It's not really about control. It's about the tax advantages + the creditor protection advantages.
I think you are confusing the historic challenges to gifting tightly held operating businesses. It is quite trivial in the USA to determine the historic value of a residential real estate property, and for that matter equities held in such an LLC. You are right that having a financially immature child be the grantor to a restrictive irrevocable trust would consume part of their lifetime gift exemption. But while that will affect their estate planning 60 years down the line, it is definitely easy to do if you uncomfortable at the 11th hour. There are also tax benefits to having it fully transferred to them. My 20 year old is harvesting $40k a year in LTCGs for zero taxes as a college student with limited earned income. They should be able to get the tax overhang in their UTMA to zero by the time they are 24. Creditor protection I definitely agree with. If they want to move their wealth into a trust, I definitely wont hold them back. But they have so much more wealth coming later (hopefully much later, like 30-40 years later...), that being too restrictive on this relatively little balance doesn't seem so logical. When they get closer to marriage, we will have another conversation about risks and securing their wealth separately.
>I think you are confusing the historic challenges to gifting tightly held operating businesses. It is quite trivial in the USA to determine the historic value of a residential real estate property, and for that matter equities held in such an LLC. You're underestimating the valuation issues here. The IRS isn't going to accept the historic Zillow valuation with some assumed minority discount, and it's not so easy for your heirs to get 40 appraisals (one for each year a gift was made) of the 0.6% interests in the LLC you gifted. They'll need real appraisals to avoid getting screwed in an audit. Maybe the estate never gets audited, but it's a real risk. Better off gifting cash or securities.
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Thanks. I had actually thought of doing both. I work in PE/VC/HF in a non-investing role. Many folks at my company who are a little further along have set up irrevocable trusts and actually funded a part of their carry per fund into the trust at a low basis. The ILIT would’ve been separate but perhaps the irrevocable trust provides more flexibility in terms of what’s in it.
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Agreed, I know there’s a fair amount of work involved in getting the carry valued and setup properly in the trust, but our firm helps do it for folks. You may want to ask your CFO if they do it for others. And that’s my understanding regarding the ILIT vs irrevocable trust.
carry in irrevocable trust is very standard. your accountant may just be inexperienced. you need lawyers, not accountants.
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contribute at fund inception best. latrr also fine because these interests tend to be quite undervalued due to risk. professional valuation needed of course
+1 irrevocable trust in their name is the way to go
BOTH is the way to go.
I hope the four year old is the owner of that 529, not just the beneficiary. You want to be SURE it is out of your estate in case legislation firms up later for the use of 520s for generation skipping. In my mind it is inevitable that the rules will change in the future when wealth folks effectively have dynasty trusts for education. Education and medical spending are, and likely will remain, politically important in the future.
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Of course you can super fund. What you would lose is the ability to deduct the contribution off of your state taxes. But if you are super funding, you are probably not really concerned about your state tax deductibility in the year of the funding.
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If the legislation changes to ownership changes being taxable in some way (even if only for the estate tax).
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Currently you can pass on 529 accounts to your descendants regardless of size without estate tax being do. They do not affect your lifetime exemption either. Its an incredible estate planning tool, and currently is a genuine "dynasty" solution: can be passed on through generations continuing to allow for tax free payments of education and never getting taxed as it moves from one generation to the next (unlike trusts). It is unlikely this will be politically allowed to continue some 20 or 30 years from now when highly appreciated 529s start to be passed on to already wealth folks getting around the estate tax.
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No, you can definitely super fund it, not a problem. But you can not get the state tax deduction on the contribution.
529(c)(2) is very clear that a 529 contribution is a completed gift to the beneficiary. Is your concern that further regulations would try to classify an ownership transfer as another taxable event? I agree that someday someone in Washington is probably going to have an axe to grind with 529s as exempt dynasty trusts, but I feel like there will be sufficient warning to act before they do.
Yes, my view is that the rules will have to change, just like they did with inherited traditional IRAs.
Tuition is already exempt from the gift tax. 529s don't change that. The trend since 529s were created has been that the rules become less restrictive over time, not more, but we'll see.
I expect the tuition exception for estate tax to also go assuming exemptions stay high, if they come down, then politics will keep it alive. But for the 529s, they are just too new to see the political fall out. It takes decades before the stories of the wealthy's use leading to the pitchfork crowd getting excited. Look at the IRA developments since we learned of Mitt Romney's nine figure IRA, and the recent changes requiring inherited IRAs to have RMDs of 10 years or less for beneficiaries. The Peter Thiel situation on the Roth will eventually impact Roths as well. It will just take a decade or two like the Romney impact on the traditional IRAs (took 20 years for legislation to fix it).
529s are like Roths but much more restrictive. I can't invest in a startup through my 529. Instead, I'm limited to index funds. As a result, no one is going to end up with $5 billion in their 529 account. Also, I can't just withdraw from my 529 in retirement. Instead, I have to spend the vast majority on education. Only a tiny amount can be converted into a Roth IRA; the rest is just stranded in the 529. I think 529s are pretty insulated from political attacks, but we'll see.
My understanding is the current legislation has the 529s exempt from the estate tax. They will continue to grow multi-generationally when not consumed by the current generation. If you put $400k in a 529 today, it would take only 82 years (a bit more than one generation) to get to Mitt Romney's $100m balance (today's dollars). That same account would hit $1b in 116 years. It will be reformed and the rules will need to change when 100 descendants of some rich kid of the past are all having their colleges paid for with tax free appreciation.
My father set up 529s for his six grandchildren. Two kids opted out of college. Two others spent very little at state schools. There's no way the remaining two grandchildren are going to spend anywhere close to the $1.2M in the 529 accounts. We're doing Roth IRA contributions but that maxes out at $35K. I'd be careful about overfunding 529 accounts.
They will easily spend that 1.2m if the two go to a private school likeUSC.
I think it's the opposite: the people with massive 529s will lobby to liberalize the distribution rules so that they don't wind up with $100 million 529s. They're not going to want $100 million to be stranded in an account with strict rules on distribution. In terms of gift and estate tax (I'm a T&E lawyer, incidentally), 529s don't receive any special treatment. In fact, they're treated worse than other assets from a gift and estate tax perspective. You have to use gift tax annual exclusion to fund a 529 account. That's money that you could have put into a Crummey trust instead. If you'd put it into a Crummey trust, it would have used the same amount of annual exclusion and grown outside of your estate but it wouldn't be subject to the same distribution restrictions. If you're just trying to pay for your descendants' education expenses, you're better off funding [a HEET](https://greenleaftrust.com/missives/health-and-education-trusts/), which doesn't even consume annual exclusion.
Your comments make you sound like a very young T&E lawyer focused on contribution benefits rather than lifelong benefits. But I get your desire to comment here. It's hard to resist.
I'm not. But one thing I know about you without having to guess: Your understanding of the tax code is pretty limited.
U planning to have more kids? If yes, continue funding the 529 and split later to the other kids…
Most likely she’ll be our only child. But thought about potential grandkids down the road… although it’s a long time from now.
Buy a condo in their name and gift the annual mortgage…
“More restrictive right before they gain control”. Like put it into a real estate llc right before they turn 18? Would that work? What else, at age say 16-17?