Financial Planning | November 2024 Giving your adult children a financial leg up through a lifetime wealth transfer

One of the simplest ways to encourage the benefits of a lifetime asset transfer while minimizing the potential downsides is to implement guardrails for distributions—and trusts can be a great way to achieve this.

“People hear ‘trust’ and ‘children’ in the same sentence, and frequently what comes to mind is trust fund kids who lack motivation or direction,” says Robillard. “But there are trusts which, with a bit of calibration, help minimize the risk of that—creating strict but flexible parameters that enable you to build generational wealth, provide opportunities for financial education, and generate tax protections for you and your adult children all while harmonizing with your other investment strategies.”

Robillard and Moy highlight two types of trusts with foundational structures well-suited to achieve each of those benefits.

1. Generation-skipping trusts (GSTs)

These irrevocable trusts mitigate tax burdens by enabling assets to leapfrog a generation by assigning your grandchildren or great-grandchildren as the beneficiaries. However, they also provide the opportunity for your children to benefit through access to income generated by the assets or access to the principal, and can help remove some of the stress they may have about how their own children will manage financially in the future.

“Minimizing estate tax is a big advantage of creating a lifetime wealth transfer strategy, and GSTs provide protection against that tax burden at perhaps multiple generational points,” says Robillard. “These trusts should be thoughtfully structured with professionals who can help create the sort of guardrails that can provide trust terms to supplement, not supplant, the beneficiary’s own wealth.”

2. Crummey trusts

This type of irrevocable trust is funded by periodic contributions held in trust and distributed to beneficiaries under specific parameters. Crummey trusts create a limited window of time within which a beneficiary can withdraw the contribution. These contributions are typically annual exclusion gifts–currently $18,000 per beneficiary in 2024–that are removed from your taxable estate. This provides you with the flexibility to move assets out of your taxable estate while setting specific terms for how, why, and when the beneficiary can receive funds from the trust.

“Applied properly, these trusts are fantastic for educating and empowering your adult children,” says Moy. “Set a 30-day window for withdrawals on an annual exclusion gift to the trust and have a conversation with beneficiaries around expectations, purpose, and goals of the trust assets. If the beneficiary exercises the right to withdraw and that goes against the expectations, purpose, and goals that the grantor has for the trust, the grantor can decide to pause or permanently stop future gifts to the trust.”

Each of these trusts provides advantages when it comes to developing a sense of purpose among your children, grandchildren, or other designated beneficiaries. With their own financial situation strengthened by the wealth transfer plans you may provide, your adult children may be more likely to embrace and participate in other areas themselves, such as charitable endeavors or careers that align with their passions instead of with their financial needs.

Without the set boundaries and rules of trusts or wills, there’s a tendency to view the distribution of cash as the sort of unstructured financial support that promotes financial dependence.

Strategic gift giving, however, is a practice in which you communicate expectations for spending while also helping your children with necessities like healthcare and goals like education and homeownership. It provides you with insights into their financial priorities and highlights pain points where personal and professional guidance can be applied to boost financial literacy. The flexibility and ability to customize your approach empowers you to reward responsible financial behavior, or to provide for big life events like the birth of a grandchild.

“A well-considered gift-giving program encourages a transparent framework for a lifetime wealth transfer plan that lets young adults understand that while they’re being cared for in the present, their financial decisions are also being evaluated in a way that will determine asset distribution in the long term,” says Moy. “With a calculated gift-giving program, you provide teachable moments that increase financial literacy for your adult children while using their responses to gifts to calibrate your approach in your estate plans and trust structuring.”

The gift and estate tax exclusion amount in 2024 is $13.61 million for individuals and $27.22 million for married couples. Your Truist Wealth team can help you understand how best to structure a lifetime wealth transfer into your financial plan, with the added benefit of reducing potential exposure to estate taxes that would activate if assets were transferred at your passing.

Planning is the key to a well-executed lifetime wealth transfer that generates financial independence and responsibility in your adult children. “It requires a big-picture view that may also include a detailed review of the impact of lifetime giving in your overall financial plan. Lifetime gifts can require coordination in cash flow management as well as your estate and legacy plans.”

Some additional components you’ll want to consider include:

• Selecting reliable, impartial, discerning trustees who can determine if, when, and how to make distributions
• Identifying learning materials or courses to boost the financial literacy of your adult children ahead of their receiving an inheritance or lifetime wealth transfer
• Incorporating potential gifts received during your lifetime from the estate of your own parents or older family members and aligning those with your giving strategy

Professional help can be crucial when you’re trying to align the goal of giving your children a leg up with the entirety of your wealth planning. The ability to make cash flow projections, create flexible estate plans, and readjust your overall wealth plan for tax code changes in a way that doesn’t impact your post-retirement quality of life are instrumental to a strategy that secures your current needs with the legacy you want to provide.

“When we sit down to help you come up with a wealth transfer strategy, all of that is taken into consideration,” says Moy. “Our approach is to build a holistic and comprehensive wealth plan that coordinates each aspect of your financial life, not just your lifetime wealth transfer strategy, in a way that allows us to be a trusted advisor to you and future generations of your family.”