I said before―one of the biggest mistakes that a lot of professors make―let’s say that they use our firm, alright? Their investments are great, their Roth strategies are great, their asset allocation is great, and the only thing they get wrong is spending and gifting. So, what happens to their portfolios over time? Higher, Higher, Higher, Higher, Higher―Death―Big Taxes―Kids Get Money When They Are 60. Lousy plan!
Maybe it makes some sense to help the kids along the way. Help them, if somebody wanted to help their kid with a house―even if they go into their IRA. Oh, that is a good idea. In your example that you had already died, but maybe you have a big IRA. Let’s say, I’m sorry―what is your name? Alright, so let’s say Frank has a big IRA right now. And he has a kid who wants to buy a house, and Frank wants to help him with the house, but all he has is an IRA. He has a $4 million IRA, and his kid is broke, and he wants to help him out with a couple hundred thousand dollars now.
Alright, so he takes some money out of his IRA. He pays the tax on it. He gifts the money to his kid. The kid uses the money to buy a house. The kid is happy because he has a house. Frank is happy because his kid has a house. But you have to pay tax on the $400,000 IRA distribution. That is okay―he has it. That is better than Frank doing nothing, and the kid gets a house when he is age 60.
True story―slight change of the facts to protect confidentiality. Two professors, they both have a good kid in the non-profit sector, alright? The one professor does not gift at all―despite me begging them to make gifts, alright? And they are not going to be around much longer. And when they die, their kid is going to be in their 60s, who has basically lived a life pretty close to poverty level, is going to inherit a lot of money when they are age 60. Not a good plan. Other professor has helped their kid all along, helped them with a house, helped them with tuition for their kids, helped them with a 529 Plan, etc. So, they won’t inherit as much when parents die when they are 60, but they will have had the use of the money.
Somebody else bought a house next door for their kid so their kid can live next door to them. Maybe a little close for some of you, but boy, isn’t that a good strategy for some of you, right?
So sometimes it just makes sense to cash in some IRA, pay the tax, and gift it to your kids. The other thing is it doesn’t have to be for a house. It can just be for a kid to put money into their own Roth or to help the kid with expenses, or by the way, a 529 Plan. You cash in an IRA, you pay the tax, you take the difference, you give it to your kid, and your kid sets up a 529 Plan. So basically, it is still going to be growing tax-free except now it is outside of your estate, which is another advantage.
Life insurance is the same, by the way―life insurance is just like a Roth, right? You have an IRA, you cash it in, you pay the tax, you buy the life insurance, and it grows tax-free―just like a Roth. You die and the money has no income tax and no estate tax. You know, the gut reaction of most professors to life insurance is that they would rather have a root canal, and I get it, but math is math, and sometimes it makes sense.