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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today by going to www.howtoretireontime.com, or if you wanna buy a physical copy, go to Amazon and search for the book, How to Retire On Time, and you can buy a copy there. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can cover it all. Now that said, please remember this is just a show.
Mike:It's not financial advice. But if you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here today. Yep.
David:Glad to be here.
Mike:Now David's gonna be reading your questions, and I'm gonna do my best to answer them. You can always submit your questions by texting them either to (913) 363-1234. Again, that's (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. What do you do if you want to help your kids or grandkids?
Mike:Yeah. I'm gonna assume it's help your kids or grandkids in a monetary sense with the question. And there's a a misnomer with this, and that's that if you give kids or grandkids any money, you get hit by the gift tax. Oh, yes. So the gift tax is if you give them over a certain dollar amount, you know, it's been around 16,000, it changes every year, that you have to pay tax.
Mike:That's not true. That's form seven o something. I can't remember off the top of my head, but it's basically, when you die, there's right now around $12,000,000 that can get passed on to your kids tax free or whoever you want, tax free. Now there's some generational taxes. There's some comp but, basically, you can get around the gift tax.
Mike:You just have to report it. So if you have a portfolio of, let's say, a million or $5,000,000, you can pretty much give whatever you want, however you want to the kids, assuming that it's not in a pretax account. So if you're gonna gift IRA money, you self pay the income tax, but you can get the money where you want them to go. So that's you can do a lot more with your money than people realize, and I wanna talk about this from an estate planning standpoint. How do you give people money?
Mike:What do you want your money to do for them? I think that's a big question. So if you want to help them with their house, buying a house Right. Why don't you just help them with their down payment? That's not usually an issue with the mortgage.
Mike:K? You can purchase part of the down payment in most situations. You disclose of it as that they're buying a part of the property, maybe they own 20%. And if you don't intend to ever really recoup that money, then when you die, you can give them a step up in the basis and give them the rest of money. Again, this is estate planning, but you can help your kids or grandkids get into homes with things like this.
Mike:Okay? If you're buying something for yourself, it's not really a gift. And this is kind of a roundabout way of saying if your grandkids, for example, or your kids need to go to technical schools or colleges, whatever it is, if you just pay for it, it's not really a gift tax situation. It's not really an estate tax situation. You're buying it.
David:Okay.
Mike:As long as they don't touch the money, it's usually okay. Alright. Make sure you're checking with a tax professional about these sorts of things. You don't mess with the IRS. You follow these things by the law, by the code.
Mike:There's code plans. There's five twenty nine plans. There's a number of different ways that you can get money to your kids' hands to help them get to the next level, whether it's getting into a house, getting an education, getting them a skill set, things like that. The I mean, the question is, what do you want your money to do for you? And if you give, is it going to hurt you, or is it not a big difference?
Mike:Okay. No one really wants to be the become the richest person in the graveyard.
David:Right.
Mike:They just don't wanna overextend themselves. They wanna, you know, get too far over their skis, as the expression So
David:when you say, like, you don't want it to hurt you, so if you're gonna give money to your kids or grandkids, you don't want it to negatively affect, like, your own tax situation? Or
Mike:Yeah. If you wanna give a lot of money and all of your assets are in IRAs, you could give too much, and now you've triggered Irma.
David:Oh, sure. Sure.
Mike:Right? So now you're paying more for Medicare. Yeah. And you're paying income tax at a higher tax rate, higher effective tax rate. So you're getting less out of your money, and you're creating more expenses along the way.
David:Yes. Because when you pull that money out of the IRA, that's when it's taxed, and it becomes income. Right?
Mike:Yeah. So it depends on where the money is and where it's going. This is legacy planning. This is Uh-huh. Beneficiary planning.
Mike:This is how do you get your money to where you want it to go efficiently. Efficiently.
David:Sure.
Mike:The answer is rarely just move it over and, you know, it is what it is. No. There there are ways to get around these sorts of things. Okay. Lot of different strategies.
Mike:When you think about Yeah. Giving to you, let's say, grandkids. I know you don't have grandkids. Where where does your mind go in in setting up kids or grandkids?
David:Yeah. I guess my mind goes to we we want our sort of posterity to have an easier time of, like, getting started. Right? Like, oh, they go to college and they accumulate a bunch of, like, student debt, or maybe you wanna help them avoid student debt altogether.
Mike:So let's dive into the five twenty nine plan.
David:Yeah. Do
Mike:that. That's where it goes. The five twenty nine plan, in simple definition, because you're not listening to this show to get a Google definition of five twenty nine plan. Right. Right.
Mike:Right. Basically, idea is, hey, let's try and boost some tax free benefits, so you can put money into a five twenty nine plan. It can grow tax free. It can pay college expenses tax free or qualified expenses tax free. It's intended to help not disrupt your personal finances, not create tax issues and and help kids with these tax benefits.
Mike:K? That that's the intention. Do I have a five twenty? I've so I have a kid. And by the way, if I seem a little tired, my daughter was born three days ago.
David:Yeah. Alright. Congratulations.
Mike:Thank you. So this is very much a topic on my mind and my wife's mind. Yeah. I mean, I've got my Diet Doctor Pepper here, a little caffeine to to help boost along the way. But I've been asked the question, hey.
Mike:You're in finance. How are gonna support your kids? And the first thing I say is I would not do a five twenty nine plan. Tell us why. Yeah.
Mike:They are heavily regulated. I can't manage my own child's five twenty nine plan, and I'm a professional money manager. That bugs me.
David:Yeah. So in what way can you not manage it? What do you mean by that?
Mike:If I put it in a five twenty nine plan, there are certain portfolios that you can pick that are managed. Oh, right. So on an oversimplified average, in the state of Kansas, the portfolio averages around like, what, six point something percent. Yeah. Mediocre returns at best.
Mike:Yeah. Okay? Because my daughter was just born. She's gonna go to college or trade school or whatever it is in eighteen years. She could afford in the five twenty nine plan, in my opinion, to take more risk.
Mike:Taking more risk. If we just put in large cap stocks, so I think of the S and P 500 Sure. Have averaged over 10% year over year growth. So why would I wanna do some arbitrary prepackaged plan that I have no control over? Yes.
Mike:And the idea was to make it simple so people who don't know what they're doing or don't have financial experience can get kind of this template cookie cutter situation with low fees. Like, I get why the state did it. Yeah. I'm not upset that they did it this way. I'm upset that those who do know can't get in there, and maybe have a little bit more flexibility.
Mike:That bugs me. Right. But a six point let's say 6.1, six point two percent average return, I don't think it's competitive at all, especially when there's restriction on what you can spend. What if my daughter, who was just born, wants to be an entrepreneur? Mhmm.
Mike:The five twenty nine plan is basically worthless at that point.
David:Right. Because you can only use it to pay
Mike:like tuitions? Tuition and certain expenses. Okay. And, yeah, if it's not done, I could kick it to another kid, or there's certain things you could do with it, but it's really intended. The best case is to use for that.
Mike:Yeah. That bugs me. So here's here's what I personally do, and I do have clients that do this for their kids and grandkids as well, but I fund them a life insurance policy. Now hear me out. There's multiple layers in why I personally believe life insurance is a more appropriate way to go about this.
Mike:It's all about flexibility. Mhmm. K? Chronic disease is a huge issue, and it's growing, we are I know I'm drinking soda right now, but we're pretty healthy overall. K?
Mike:Sure. Sure. Sure. We cook at home, whole foods, very much vegetables. We have studied how to cook vegetables.
Mike:We're not eating them out of a can, like we're actually cooking them. So we are very nutrition focused, we exercise regularly. We have a gym here at the office, just so I can move. We're very health conscious. Yeah.
Mike:But chronic disease is an issue, I'm not gonna spout off the statistics, but kids are getting more and more sick. I don't want my child's sickness, I will do whatever it takes to make sure my child can heal, but if she gets sick, or any child, I have a son as well, if they get sick, I want to be prepared for that. I'm using life insurance to be able to tap into a chronic death benefit rider in case they got sick in whatever way possible to hedge against that financial risk. I'm using life insurance in the horrible situation that someone were to die. Yeah.
Mike:Yeah. Then I could take the death benefit. Sorry. I mean, she was just born three days ago. So okay.
Mike:I'm not gonna apologize for that. Yeah. Love my kids. But I would be able to create an endowment or a foundation in their name and have a gifting situation in memory of her. Okay?
Mike:And the reason why I say these things is because we had a childhood friend up in Redmond, Washington. The son died from cancer at a young age. He never got to live his dream of even doing baseball. So there's a statue in memory of him, and there's a foundation. Like, it was done correctly.
Mike:K? They just happened to have these things set up. I don't know why they did it this way. Yeah. But it it it's a memory of him.
Mike:K? You want the memory of your child to be set up that way. Yeah. It's not just some five twenty nine plan, and then hope it works out. K?
Mike:So I do want a death benefit on my kids that if the worst should happen, and I hope no parent has to bury their child. Yeah. But that can be set up. I want the chronic death benefit because I have I won't say who, but someone sorry. Very near to me, their parents almost got bankrupt because they went into a random sandwich shop.
Mike:The kid got hepatitis C. Oh. He spent the next couple of years in the hospital in the ICU. He should have died. Uh-huh.
Mike:Now there was a lawsuit that was able to help pay for it all, but the parents were financially strapped. So if your kid gets some sort of chronic or terminal illness, tapping into a death benefit can help alleviate look. It is difficult. We are in the silent depression. It is difficult for parents to be able to maintain their personal livelihoods.
Mike:So when a kid gets sick, it is astronomically more difficult. Mhmm. Five twenty nine plans don't do this. Mhmm. So, again, look at the child's lifespan as a whole.
Mike:You want a gift to your kids, but you need multiple layers for it. Okay? And so if I can get a death benefit, if I can get a chronic illness rider, if I can get a terminal illness rider, if I can set up these multiple layers and the cash value
David:There we go.
Mike:Associated with it is greater than the average of a $5.29 plan, let's say I can get the cash value, then we can grow it to basically the same or maybe a little bit better cash value with more control that I have now on how I'm allocating it
David:Yeah.
Mike:So that when they get to college, they might have a little bit more money.
David:And so once that cash value has grown over the whatever
Mike:Yeah. Now you
David:those two decades.
Mike:Here's what I'm doing. I'm gonna borrow against the policy, borrow against the cash value to pay for most of the college. I do believe they need to pay for some of it. Yeah. Whatever it is, you gotta have skin in the game.
Mike:Yeah. Students that pay for part of their college statistically do better in school than those where it's completely paid for on their own. Mhmm. So it's important to have skin in the game. But then I want a little extra to help them with their down payments.
Mike:Now notice, I own the policy. Okay. But I'm paying for these things. Yeah. So it's not a gift tax situation.
Mike:I'm paying for certain things, so I'm running it down. But with life insurance, you're borrowing against the policy. So if the cash value grows at a faster rate than the loan amount, then by the time they hit retirement, the money that I paid for their school or used to pay for their school and the money I I used to pay for their first house, and whenever they got married, there's a built in term life insurance policy, which is one less expense that the kid has to pay for when they start their family. All of that is baked in for their entire life. Wow.
Mike:And then at the right time, I then fill out form seven zero nine. I gift them as a part of my estate tax. I gift them, so it's tax free to them. They now own their own policy when it's appropriate, and now that policy can grow. And if they have cash needs, they can take it out of a principal protected cash source to get through difficult times, job loss, illness, whatever it might be, and then the rest is set up for their retirement.
David:Okay.
Mike:So, yeah, life insurance gets a lot of crap, but when you have certain needs and you're willing to pay for it and you set up the policies correctly, then, yeah, when I look at kids or grandkids and the journey that they're gonna go on and the financial risks along the way, I'm going to manipulate life insurance policies in such a way that it's gonna check off certain boxes and not try and do other things. That's how life insurance should be. It's not an investment. It's a product or transferring certain risks, and say no to other risks so it can be efficient on the growth of the cash value itself. Yeah.
Mike:What was the question again?
David:Hey, Mike. What would you do if you want to help your kids or grandkids?
Mike:So this show is probably listened more by people who have grandkids. So let's let's just lay it all out. Yeah. If you wanna help your grandkids out, they're being born and you're excited about it, think of how much money you would wanna give them. And if you wanna do the $5.29 plan, great.
Mike:Yeah. It's a great option. If you want a more comprehensive way, how much can you afford to give without hurting yourself? Then you gotta figure out how much can you put into there over 5 to 7 years you wanna fund the policy. Okay.
Mike:And there's different ways you could structure that. You gotta commit to it though. Uh-huh. Okay? Because you have to make these equal payments, or else it's a taxable event, you wanna avoid that.
David:Okay.
Mike:The parents of the children have to have term life insurance that is at least twice the death benefit that your kids are gonna have. Look, this stuff gets complicated, but you can structure it all in a
David:way Yeah.
Mike:That you can put the funds into the name of the child's life insurance, and then help fund them with all of these different things along the way. Yeah. It is a very complex thing to do, but when you look at the overall benefits of what they can get, and the financial risks that you're basically transferring to an insurance company, it might make sense in your situation. Yeah. It's all about structuring the policy correctly.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts, just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles, or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis.
Mike:Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to ww.yourwealthanalysis.com today to learn more and get started.