The Grandparent’s Guide to Asset Gifting
by SGL Financial
Our 2 Cents – Episode #205
The Grandparent’s Guide to Asset Gifting
We are back with a great episode of Our 2 Cents with Steve and Gabriel Lewit! On today’s show, Steve and Gabriel answer a thought-provoking listener question and dive into everything you need to know about asset gifting to grandchildren. Listen in now using a link below!
- Quotes of the Month:
- “Money frees you from doing things you dislike. And since I dislike doing nearly everything, money is handy.” – Groucho Marx
- “Wealth consists not in having great possessions, but in having few wants.” – Epictetus
- Gabriel’s ‘Quick Hits’:
- Discover the current landscape of tariffs, shaped by ongoing trade tensions and evolving policies, and what it could mean for you.
- Gain insights about the new tax bill recently passed by the House.
- Listener Question:
- “We’ve always dreamed of having a vacation home to visit several times a year once we’re retired, and while I think we can afford it, I’m unsure whether to take out a mortgage on the vacation home, tap the line of credit on our primary home, or sell some investments to buy it with cash—how would you advise me?” – Terry
- Gifting Assets for Your Grandchildren:
- Explore various gifting options that can help build a nest egg for your grandkids.
Request Your Free Consultation Today
847.499.3330
Podcast Transcript
Announcer: You are listening to Our 2 Cents with the team from SGL Financial, building wealth for life. Steve Lewit is the President of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Well, hello everybody. Welcome to Our 2 Cents. It’s a sunshiny day here. The birds are chirping even though it was snowing yesterday. The fake spring is gone.
Steve Lewit: It’s gone.
Gabriel Lewit: And we’re back to winter.
Steve Lewit: We are back.
Gabriel Lewit: But the birds are chirping.
Steve Lewit: Yes, they were.
Gabriel Lewit: So that’s good. Well, yeah. Welcome back to our show here today. We are excited to have you here. We’ve got a range of different topics, of course, lined up for you here today. Going to start off with a couple of inspirational quotes, so we’re going to get you up and jazzed up here mentally.
Steve Lewit: I think we need some inspiration.
Gabriel Lewit: We sure do.
Steve Lewit: Right. Do you feel like low energy today?
Gabriel Lewit: No, I’m as juiced up here as I’ve ever been.
Steve Lewit: You look juicy.
Gabriel Lewit: Yes.
Steve Lewit: I just want to tell you that.
Gabriel Lewit: I guess that’s good.
Steve Lewit: Well, we’ll see.
Gabriel Lewit: Yes.
Steve Lewit: We’ll see how juicy you are.
Gabriel Lewit: All right. Well, with that being said, yeah, I’m not sure where to go with that.
Steve Lewit: No problem. Maybe nowhere.
Gabriel Lewit: I’m going to go with the quote I had otherwise planned to talk about.
Steve Lewit: Okay. I’m with you.
Gabriel Lewit: All right. So yeah, our first quote for today, which of course we love to wax philosophical here on the show, is from Groucho Marx. He’s a famous comedian, although I think he was a little bit before my time. He might’ve been in your time, mister-
Steve Lewit: Well, wait, wait, wait. Tell them the entire story.
Gabriel Lewit: I said I wasn’t sure who Groucho Marx was.
Steve Lewit: No, you didn’t say he wasn’t sure. You said-
Gabriel Lewit: No. I said-
Steve Lewit: You said, “Who is Groucho Marx?”
Gabriel Lewit: Well, I said I’ve heard of him before, but I had to look him up to see who he was. Yes. I did like his quote here though. All right, you ready for it?
Steve Lewit: I’m ready.
Gabriel Lewit: All right. Drum roll here.
Steve Lewit: Drum roll.
Gabriel Lewit: Well, they can’t hear that I don’t think. Now you got to go [mouth noise].
Steve Lewit: [mouth noise].
Gabriel Lewit: “Money frees you from doing the things you dislike, and since I dislike doing nearly everything, money is handy.”
Steve Lewit: Go Groucho. I love it.
Gabriel Lewit: Have you ever had a client that feels that way?
Steve Lewit: Well, let me think. Not quite that way, but it makes a lot of sense, doesn’t it?
Gabriel Lewit: Well, I’m going to do some competing quotes of the month here, of the day.
Steve Lewit: Well, you think about all the things that money releases you from in your daily life, like you can hire a house, someone to clean the house
Gabriel Lewit: Or does it? Because Epictetus says, “Wealth consists not in having great possessions, but in having few wants.”
Steve Lewit: AH. Epictetus. Wait a second.
Gabriel Lewit: Epictetus.
Steve Lewit: Epictetus?
Gabriel Lewit: I think so.
Steve Lewit: Can we look up the proper-
Gabriel Lewit: Yeah, I think that’s how you pronounce it.
Steve Lewit: Let’s call him by his proper name. Now, was he a senator or a…
Gabriel Lewit: I think he was a comedian.
Steve Lewit: Okay.
Gabriel Lewit: Epictetus. Epictetus. It’s saying eh – puhk. Eh – puhk? How do you-
Steve Lewit: Any historians out there.
Gabriel Lewit: I’m going to go with Epictetus.
Steve Lewit: When did Epictetus live?
Gabriel Lewit: He was a philosopher, by the way.
Steve Lewit: I know that, but when? That must’ve been like in 1300.
Gabriel Lewit: Well, I don’t know because I don’t know a lot of things.
Steve Lewit: Well, you got to know who you’re quoting.
Gabriel Lewit: We’ll you’re way off. 1300. 55 to 135 CE. He was a Greek Stoic philosopher.
Steve Lewit: Right.
Gabriel Lewit: Okay? Who lived in what’s now Turkey.
Steve Lewit: Got my dates wrong.
Gabriel Lewit: Yeah, by a couple years.
Steve Lewit: Yeah. Well, you got to know who you’re quoting. You just can’t take quotes from anybody. You have to vet your quotes.
Gabriel Lewit: So folks, I’m curious if you’re listening out there, whose quote… It’s like the dueling pianos, but okay, you got to pick one side or the other to root for here. Whose quotes do you prefer? Okay? You got Groucho Marx. “Money frees you from doing things you dislike, and since I dislike doing nearly everything, money is handy.” Or Epictetus says, “Wealth consists not in having great possessions but in having few wants.” And being very, I guess, content with where you are in your life.
Steve Lewit: Living the simple life.
Gabriel Lewit: Yes.
Steve Lewit: Don’t need much. Cook my own dinner.
Gabriel Lewit: No possessions, no money.
Steve Lewit: Clean my own apartment or a little room that I have, make my little cot bed.
Gabriel Lewit: So yeah, send us your thoughts. Info@SGLFinancial.
Steve Lewit: I’m into Groucho. I’ll take Groucho.
Gabriel Lewit: I’m not sure where you’re going. Do you have a small room with a cot bed?
Steve Lewit: No, I don’t.
Gabriel Lewit: Okay. Well… You’re in a special place this morning. Mr. Lewit.
Steve Lewit: Well, you started with Epictetus.
Gabriel Lewit: I think that’s just his name, but okay.
Steve Lewit: Okay. Yep.
Gabriel Lewit: All right. So yeah, we’d love to hear your thoughts there just for a little bit of fun there. Let us know. Info@SGLFinancial.com and then let us know which quote you prefer.
Steve Lewit: Well, there’s something to be said about a simple life, isn’t there?
Gabriel Lewit: There is. There’s people that they have billions and guess what they want? They want more billions. And the question is, why do you need more billions when you already have billions?
Steve Lewit: And then there are people that have billions that don’t spend much money.
Gabriel Lewit: Well, and there are people that have no billions that are happier than the people with the billions.
Steve Lewit: Yes.
Gabriel Lewit: Yeah, so it’s an interesting thing to think about and ponder. And it does, obviously for us being money guys, we are here to grow your money, but what you do with that money is up for discussion. And also how much money you feel you need to have to be happy is a big part of your overall planning.
Steve Lewit: It’s problematic being happy by buying stuff. There’s no end to that.
Gabriel Lewit: Yes. Correct.
Steve Lewit: So, we can do a philosophical happiness show once in the future.
Gabriel Lewit: Sure. I’ll let you map that one out.
Steve Lewit: Okay.
Gabriel Lewit: Okay. Well, yeah. So I’ve got a couple things here. I’ve got a couple quick hits for you. Okay? Just little things in the news just to keep you up to date. We’re not going to talk much about these. You’ll probably understand why in a second. But yes, there are new tariffs being proposed and or levied as we speak.
Steve Lewit: And or taken away or…
Gabriel Lewit: Repealed.
Steve Lewit: Repealed. Thank you. I couldn’t think of the word.
Gabriel Lewit: So, there’s still this clear uncertainty and the market has been reacting to that unfavorably in the last couple of days about what the purpose of these tariffs are, what the end goal is of these, what’s the intention of them. Are they just a negotiating tool? Are they here to stay? Are we going to enter into a trade war? I remember we last talked about a trade war the last time Trump was in office. And trade wars generally are not advantageous. I also was just reading this morning, which is relevant, will tariffs have an increased risk of a very undesirable economic term called stagflation? Which is when you have a stagnating economy at the same time that you still have rising inflation. That’s potentially an outcome that is very undesirable because there’s very few tools that the economic people that run the country can use to offset stagflation should it occur.
Steve Lewit: Yes. What was that phrase you used? I love it. Clear… You said earlier
Gabriel Lewit: I said a lot of phrases.
Steve Lewit: No, it was great because it was clear confusion.
Gabriel Lewit: I did not say clear confusion.
Steve Lewit: No, but you used the word clear. I know you did.
Gabriel Lewit: You’re talking about today?
Steve Lewit: Just now. Just like before you got off on all the different things, you said it’s clear confusion or clear chaos or something like that. Anyway, but I love the word because it is clearly confusing. We don’t know what’s going on. And again, this is not a political statement. It’s just the way it is. If tariffs are great, then why repeal them? If you’re going to repeal them and then put them back a month later, how does that work?
So it is very confusing and the market is reacting to that confusion by going down or pulling back a little bit. The market does not like uncertainty and neither do businesses. A lot of businesses today are holding back. I was reading this morning that there are a lot of manufacturers, housing manufacturers, that are putting a pause on building because they don’t know what the cost of their supplies are going to be. So there’s a tremendous impact in the economy and we’ll see how it works out. I hope it works out well, of course, but we’ll see.
Gabriel Lewit: Yeah. So it’s just something to keep an eye on. And our job here is, we are not newscasters, but we do have a podcast about finance and economy and markets and retirement. So these things could impact you, so we did want to just report that little quick hit.
Similarly, there is at some point here potentially going to be a new tax bill. All right? And a new tax plan and a new budget plan being proposed in the House. And we are keeping tabs on that. So there is no definitive final new implemented tax plan yet, but people have been asking us about that. So I just wanted to touch upon that, that we are keeping our eyes and ears open for news on that. And we will continue to give you some further updates there. But there was a plan passed by a vote of 217 to 215 in the house just recently in the last week. Okay.
Steve Lewit: Not sure it’ll get through the Senate,
Gabriel Lewit: Right.
Steve Lewit: We’ll see.
Gabriel Lewit: So yeah, so stay tuned on that. But yes, some progress of different, various kinds there being progressed on.
Steve Lewit: Clearly progressed.
Gabriel Lewit: On the tax bill front. Okay.
All right. So I wanted to switch gears here a little bit than our normal podcast and just talk about a listener question that came in first before… We usually bury those for last if we have the time. And yeah, a listener question came in here just from the other day from Terry. Okay.
And Terry, I like this question because it is one that we actually have a lot in our meetings with clients, which is basically, you mentioned you dreamed of having a vacation home or a second home to visit a few times per year when you’re retired. And the question you have, Terry, is where do you get the money from to pay for that second home? Should you take out a mortgage? Should you tap a line of credit on your current home? Should you sell investments to buy the new home with cash? What’s the best way of financing or purchasing a second home or a vacation home?
Steve Lewit: Yeah, that’s a great question, isn’t it?
Gabriel Lewit: Mm-hmm.
Steve Lewit: Yep.
Gabriel Lewit: Yep. Because I’ll always start with taking out… This has kind of always comes to mind here. For me from a tax perspective, taking out a giant lump sum from an IRA, which many people have all their money in IRAs, 401-Ks, right? Let’s say you need $500,000. Mr. Lewit. Is it a good idea, I know you know the answer but I’m going to propose it this way to pull out $500,000, if you need it net, actually, you got to pull out $700,000 lump sum from your 401k to pay off your vacation home in cash, in full?
Steve Lewit: Well, if you’re in the business of supporting the government with taxes, that would be a great idea. I don’t think we’re in that business.
Gabriel Lewit: Can you explain?
Steve Lewit: Well, it’s all taxable. It all comes out as ordinary income. It will drive you into the highest tax bracket, probably 37% or 40%, and you have to take out more money out of an IRA to pay for the house because it is taxed. So if you were going to use funds that you have saved, then you’d probably be better off going to a non-qualified or non-IRA account. Now there, you might have to pay capital gains.
Gabriel Lewit: If you have one. I’m just going to go out on a limb here. Many clients of ours don’t have $750,000 or $700,000 saved up in a after-tax non-qualified account. Many have saved all their money in pre-tax IRAs and 401-Ks.
Steve Lewit: Well, the statistics… It’s interesting you brought that up. The statistics show that 75% of money accumulated for retirement is in qualified accounts, in taxable, pre-tax accounts where when you take the money out, it’s all taxable. And it’s taxable ordinary income. So if that’s not the case, then you have to go say, “Well, maybe I should take a mortgage.” Okay, well what’s the problem with the mortgage, Mr. Gabriel?
Gabriel Lewit: Currently?
Steve Lewit: Currently.
Gabriel Lewit: The interest rates are not very attractive relative to where they were four years ago.
Steve Lewit: They’re at 7%. Four years ago, there were-
Gabriel Lewit: I think they’ve come down a little bit, but-
Steve Lewit: I’m not sure.
Gabriel Lewit: But they’re still not great. They’re not very attractive. Even if it was 6%, I remember when I bought a mortgage… Let’s see, originally it was eight years ago now. It was 4.5%. And I was like, “Ugh. No.”
Steve Lewit: I have clients with a 2.5% mortgage.
Gabriel Lewit: Well, now from refinancing. My point is even when it was 4.5%, I said, “Ugh, that’s not very good.” So when they’re 6% or 7%, it’s not very attractive. So keep that in mind as well. Rates are still generally in the mid to upper 6% range and that makes payments on mortgage is pretty unattractive.
Steve Lewit: Yeah. At 6.6%. You’re absolutely correct. The last number I had was 7%.
Gabriel Lewit: And there is of course, a mortgage interest deduction from a tax perspective that actually would help you save on taxes if you took a mortgage. And by and large, I would suggest, obviously you could run both options in your plan, depending on the amount that you need to purchase for a home, how much you have in cash, how much you have in non-qualified stocks, and how much you’d ultimately have to pull from an IRA. But keep in mind, be very cautious before. You don’t just run out there and just pull money, large sums of money willy-nilly out of your investment and retirement accounts without considering the tax ramification.
Steve Lewit: Even taking a HELOC out, you’re still going to pay a pretty substantial interest rate on that. If you’re over 62, I’ll throw this out, you could consider a reverse mortgage to pay for a second home. Now, reverse mortgages in the past had a very bad reputation, but they’ve improved those a lot and worth considering.
Gabriel Lewit: Can I tell you? They still are very unpopular.
Steve Lewit: They’re unpopular, but they do have, in certain instances, they can be very useful.
Gabriel Lewit: Yeah. You could consider it is an option. But folks listening out there, I know your first reaction to us is, “Ugh.” It just always is. I don’t know why anybody-
Steve Lewit: That’s why they love us because we bring in things that they say, “Ugh,” too.
Gabriel Lewit: But yes, you can in theory buy a second home with a reverse mortgage. Right approach.
Steve Lewit: On your current home.
Gabriel Lewit: Yeah. Well, yeah. You can also buy and take a reverse. There’s all sorts of interesting things that you can do in that world, but most people immediately write them off and don’t even want to look at them just because of the ugh-factor that they have.
Steve Lewit: Well, they have a history, but a lot of stuff, there’s a lot of old history out, that things have been improved. So I’ve had clients take reverse mortgages and it’s really helped them in their lives. It’s an option.
Gabriel Lewit: Yep. Indeed, it is. So yeah. Terry, I hope that helps a little bit with some of the decisions. Of course, not knowing your full financial picture can’t give you an immediate answer to that, but hopefully that helps give you a couple key guiding points as you start to explore that option. And if we can help you with that, give us a call here. (847) 499-3331. Or sorry, that’s my direct line again. 3330. Because you started laughing at me halfway through the phone… What is the-
Steve Lewit: Because I said to myself, “Here comes the commercial.”
Gabriel Lewit: And then you got me confused. You’re laughing at me while I’m… So yes, call me then, not Steve.
Steve Lewit: I said I bet he’s going to put in a commercial right here. If you need some help…
Gabriel Lewit: The one thing I don’t think we do in our show, which some places do, which I don’t know, I’ve listened to other podcasts, is when they purposely break for a commercial and the little music comes back.
Steve Lewit: We could do that. I could sing for it. I could sing the intro
Gabriel Lewit: Instead, I just do obviously a little plug for us here to give us a call if you need help.
Steve Lewit: It’s very nice.
Gabriel Lewit: Go to our website, sglfinancial.com.
Steve Lewit: I think it’s very nice.
Gabriel Lewit: Or email us info@sglfinancial.com.
Steve Lewit: It’s beautiful. You do a great job of that. I just saw it coming a mile away.
Gabriel Lewit: And then we got to get the announcer voice back on the intro. Gabriel and Steve.
Steve Lewit: Welcome back.
Gabriel Lewit: Anyways. Yeah. So yeah, moving on back to the originally scheduled broadcast here.
Steve Lewit: Okay. All right.
Gabriel Lewit: We are going to talk to you today about UGMAs, UTMAs, 529s, but in the context of gifting money to your grandchildren. I don’t know the last time we’ve talked about this on the show. I didn’t go back and look.
Steve Lewit: And I don’t know if we’ve ever. Have we ever?
Gabriel Lewit: It’s possible we’ve never. There are many financial concepts out there that we have talked about, but yet again, still more that we haven’t. And yeah, this is an interesting one. Okay. And in fact, many of these are inspired by conversations I have with clients. And this one in particular was one I had fairly recently with a grandparent saying, “Gabe, how can I gift money to my grandchild?” And I said, “That’s a great question. Let’s talk about that.” Okay.
Steve Lewit: Some are specifically for college.
Gabriel Lewit: Well, yes.
Steve Lewit: Was this for college?
Gabriel Lewit: No, not specifically.
Steve Lewit: Okay.
Gabriel Lewit: But it is an option. So yes, first and foremost, let’s talk about college, gifting for college, which is a very common goal from a grandparent. Why? Because by the time your grandchild is college age, it’s only going to cost you probably 1 million dollars per year to go to college.
Steve Lewit: More or less.
Gabriel Lewit: More or less. Plus or minus $800,000. I don’t know. But yeah, very expensive, very expensive. So kids need help with college payments. Why? Because it’s really, really hard for kids coming out of college to be saddled with hundreds of thousands or tens of thousands of dollars of debt with big, high interest payments now with interest rates being higher. And on top of that, kids already can’t afford homes because of high mortgage payments and high property taxes. Combine that with high school loans and they’re really starting off digging out of a very, very deep hole.
Steve Lewit: And that hole could take 10, 15, 20 years to get out of.
Gabriel Lewit: It can.
Steve Lewit: The debt coming out is huge and these folks are starting at lower salaries and can’t accelerate the payments on that.
Gabriel Lewit: Yeah. And so look, as a grandparent, you of course could do nothing and just leave your money to your kids and then hope that your kids give money in some way, shape or form to your grandkids. Or you can skip the kids and go direct to the grandkids and do whatever you want to do and make sure your wishes are reflected that way. Also, it’s kind of cool. It’d be like, oh, cool, grandma paid for college, or grandpa paid for college, right? It’s a nice long-lasting memory that you’re also providing not just the money, you’re providing life memories, if I would sell it there a little bit, right? So I think it’s pretty cool.
Steve Lewit: I’ll just add into this, Gabriel, that that is a discussion that I hear often. Should we give the money to our children and let them disperse it as they wish, or should we give it directly to the grandkids? Sometimes that’s not an easy decision.
Gabriel Lewit: Well, in the terms of 529 plans, to me, it’s an easier one because it’s advantageous substantially for the grandparent to own the 529 plan versus the parent because some of the built-in tax advantages that exists with that structure. Okay. And what is the tax advantage I’m referencing? Well, if a parent or a child has a 529, it’s likely to be included in the cost of college aid. When a grandparent owns the 529-
Steve Lewit: Against the cost. In other words, it won’t offset though it’s a countable asset.
Gabriel Lewit: Yes. Be a countable asset in the sense of figuring out how much aid you would receive from a college, right? If a child owns the 529 or the parent owns the 529, it’s going to be counted in some capacity. Now, we’re not going to get into the nuances of how much these things are counted here. That’s a whole other conversation. But when a 529 is owned by a grandparent, it does not have that same tax disadvantage. Or, sorry, not tax disadvantage, but countability disadvantage that 529s owned by parents or kids can. Okay? So how do you fund one of those Mr. Lewit? Do you want to walk through that? You want me to take point on that?
Steve Lewit: Yeah. 529s are not my favorite vehicle.
Gabriel Lewit: I like 529. I know you’re maybe too old-school or something.
Steve Lewit: No, no, no. I would do it a different way using… Shall I say it here?
Gabriel Lewit: You can talk about that in a second, but don’t steer me off track here. That is one of the options.
Steve Lewit: All right.
Gabriel Lewit: Yes.
Steve Lewit: Well, reverse mortgage was one of the options too.
Gabriel Lewit: Not for college.
Steve Lewit: Actually…
Gabriel Lewit: All right. Yeah. In theory, yes. You could use a reverse mortgage for anything. So yes, yeah, you could use it for college, but that’s not what we’re talking about here.
Steve Lewit: That’s right. Okay.
Gabriel Lewit: All right. Yes. What do you do? Well, you would open up a 529 as the owner. You the grandparent, grandma, grandpa, or both. Okay? You could both own different plans I mean. You’re not typically a joint owner of the 529. And then you fund it. Okay?
And typically, there is no single-year contribution limit to funding a 529. There are some maximum contribution limits that are generally very high and 529 plans do vary state by state, so there’s a lot of little nuances here we can help you with. However, if you’re trying to gift money to a 529, there’s an annual gift amount that is of course $19,000 a year per person. Okay? So you grandma, grandpa could gift into a 529 up to $38,000 a year without using up any of your lifetime exemption or exclusion.
Steve Lewit: Can you explain that last piece?
Gabriel Lewit: Yes. So a lot of people think if they gift over that $19,000 amount, that they will owe gift taxes. That is not true, right? You would not owe gift taxes unless you’ve used up your… What’s the lifetime gift exclusion, Katie? Just get the exact number here.
Steve Lewit: 13 million.
Gabriel Lewit: I’m giving the exact. Yes, the exact. Okay?
Steve Lewit: 13.2?
Gabriel Lewit: Yeah. So hold on. It’s going to be up here. 13.99 million. They could have rounded it to 14, but I guess 13.99.
Steve Lewit: So, if you’re two people, if you’re a couple married, then your exemption is 28 million, 13 times 2, 14, 28 million dollars.
Gabriel Lewit: 27.98.
Steve Lewit: Yeah. So, you could gift folks. We just want you to know you could gift how much?
Gabriel Lewit: 27.98 million.
Steve Lewit: 27.98 million to your grandkids and not pay a gift tax.
Gabriel Lewit: You could, yeah.
Steve Lewit: Just keep that in mind.
Gabriel Lewit: Yeah. So yes, but the key here is if you do have a high estate or estate tax planning is your concern, then gifting annually is a nice way to get money out of your estate, but also not use up that lifetime gift exemption. But either way, a lot of times people try to stay under that limit just for whatever reason that they desire, because unless you have a really huge level of assets, the other strategy I mentioned may or may not be needed by you.
So you can obviously fund more than one 529 if you have more than one grandchild. So you can do that in a couple different ways, of course. And yes, that’s going to be, in my opinion, a much more advantageous way than giving money to your kids. And then your kids give 529 for their kids, just leave it in grandma or grandpa’s name. Now, what can your grandchildren use this money for? They can use it predominantly for college or higher education expenses. And they can pull out the money completely tax-free when used for those reasons.
Steve Lewit: That’s correct. Now Gabriel, what happens if the child does not go to college?
Gabriel Lewit: Yes, that’s one of the risks, which is if you have too much excess money in a 529, well, the beneficiary can be changed from say one grandchild to another. But let’s say it’s only one grandchild and they didn’t go to college and there’s $200,000 in the 529, it can be used for other purposes, but it will not be a tax-free withdrawal. And yeah, it’s something to be aware of there. You lose some of the big tax advantages.
Steve Lewit: So, on a 529, it’s not really very flexible on how that money can be spent?
Gabriel Lewit: Yes. Correct.
Steve Lewit: And now you’re going to talk about UGMAs, right?
Gabriel Lewit: Well, I was going to say, yes, there’s something else called a UGMA or an UTMA, which is where you can… It’s a uniform gift to minors act or uniform transfers to minor act is what UGMA, UTMA stands for, but it’s called a custodial account. So you go to Schwab, you go to Fidelity, open up my account for the benefit of one of your grandchildren, and you can fund it. You can fund it with cash, you could gift it. Some appreciated stock. We could talk about that in a little bit. That could be a strategy for tax-planning purposes.
What’s the downside of an UGMA or an UTMA? Predominantly, the big downside is that if your grandchild is going to go to college, it will be countable as an asset that they have that should be in theory used for college expenses, and it will reduce the potential financial aid that they will receive. Now, the benefit of the UGMA or the UTMA is that it isn’t just for college so you can use it for other things without taxes or penalties.
So now gifting appreciated stock. Many grandparents have high capital gains stock that if they were to sell it, they’re in a higher tax bracket. You can actually gift appreciated stock every year to a grandchild. Then the grandchild could sell it at a lower or tax-free 0% tax bracket, which is kind of neat as well. So there are a lot of different scenarios here of how to handle things from a tax planning perspective as well as helping your grandchild. But there’s dual purposes here, which is kind of interesting as well.
Steve Lewit: Yeah. Should I get detailed on another option? Or would you think for [inaudible 00:27:36]?
Gabriel Lewit: How about for one minute you talk about it?
Steve Lewit: Okay, this is a one-minute… Let me plant a seed for all of you. What you could do, which we’ve done for many of our clients is buy… Now, I’m going to say the word life insurance. I don’t want you to turn off your ears, but you buy a life insurance policy that’s designed to accumulate lots of cash inside of it. And you buy that on your kids, one of your kids.
So let’s say you have a grandchild that’s three years old. So you’ve got, let’s see, 15 years before they go to college. So maybe you put in X amount per year, but then when they go to college, that cash is available to pay for college and it comes out tax-free. And it’s a great… Now the other part of that is you as the buyer of the life insurance actually own it. So it could be if you actually got into trouble in your own finances, you could actually use that cash in that life insurance if it actually came to that. So it’s hard to explain in one minute, which Gabriel gave me one minute.
Gabriel Lewit: You can have 30 more seconds if you’d like.
Steve Lewit: Yeah. It’s something to consider and it’s out of the ordinary, but are so many things that are kind of out of the comfort zones that we all live in. And life insurance, using life insurance as a funding vehicle is one of those things.
Gabriel Lewit: And to elaborate on that, I think people might be thinking, “Well, I’m 75 years old, I can’t buy life insurance.” Well, you can pay for the life insurance, but you would not be the insured.
Steve Lewit: That’s right.
Gabriel Lewit: Your grandchild’s parent, your kid would be the insured or your kid-in-law would be the insured. And ultimately, the goal of course would be for them to understand that the money really is for the benefit of the grandchild. And you as the owner can determine essentially the distributions of funds from that as long as you’re alive.
Steve Lewit: That is correct.
Gabriel Lewit: And in theory, you could even start to utilize trust and trustees with various types of assets as well to truly direct what your money gets spent on. That’s a whole other conversation shifting more into estate planning. But if you truly want to make sure your money goes for a specific purpose for your grandchild, lots of different ways ultimately is the point here that you can set that up.
Steve Lewit: Exactly. And what Gabriel is going to do now, is he’s going to give you our phone number and say, “Hey look, if you want to do something for a grandchild, please come in and talk to us because there are lots of different strategies that you could use.”
Gabriel Lewit: I actually wasn’t ready for the phone number yet.
Steve Lewit: Oh, man. I felt it coming.
Gabriel Lewit: Yeah.
Steve Lewit: It’s like picking a stock. I’m one for one.
Gabriel Lewit: So, what I was going to say is interesting to me-
Steve Lewit: One out of two.
Gabriel Lewit: Very few grandparents do this. I thought it was very interesting. And I’m not sure why, but it’s a great way to save taxes, great way to create a legacy, great way to create a story about something cool other than again, you leave it to a general fund or a general pot to your kids, and then the kids do something with it. There’s no story there. And I think everybody, I think, is kind of interested in leaving a legacy or leaving a story, something that they’re remembered by. And this is a great way to do it because kids are always going to be like, “Wow, it was so great grandma and grandpa really helped pay for college.”
Steve Lewit: Are you trying to tell me something here? Is this a subtle message to your dad?
Gabriel Lewit: Well, if you’re picking up what I’m putting down.
Steve Lewit: I keep getting this subtle message that, dad, why aren’t you-
Gabriel Lewit: Well, you do have grandchildren.
Steve Lewit: I do have grandchildren. Yeah.
Gabriel Lewit: You do have grandchildren. I’m just saying. I’m just saying.
Steve Lewit: Eat your own food, dad.
Gabriel Lewit: All right, guys. Well, yes, if you do have questions on this, give us a call. (847) 499-3330 or go to sglfinancial.com, click contact us or email us for questions or to schedule a time to meet. Email us info@sglfinancial.com. And don’t forget to tell us which quote you preferred, Groucho Marx or Epictetus’s, because we’d like to know which side of the fence that you’re on.
Steve Lewit: I have nothing to say. It’s like, okay, I can’t even pronounce Epictetus.
Gabriel Lewit: Epictetus.
Steve Lewit: Epictetus.
Gabriel Lewit: Oh, funny. Can I say one last thing that’s totally randomly off-topic that this just made me think of? You know the tongue twister things where you say 10 times in a row?
Steve Lewit: Yeah.
Gabriel Lewit: I kind of have this lifelong goal of finding the hardest one of those that’s literally impossible to do.
Steve Lewit: I love those. When I was singing, we used to use those all the time to get our lips moving.
Gabriel Lewit: And this is like three weeks ago or four weeks ago, I randomly stumbled across one that I think is one of the hardest ones I’ve ever done. Now, I’m not going to do the 10 times in a row on the show because I would look silly, sound silly, but I encourage you all to try this at home, okay?
Steve Lewit: Okay.
Gabriel Lewit: You want to know what it is?
Steve Lewit: Absolutely.
Gabriel Lewit: And I’ll give you the story behind it. It’s show in the snow.
Steve Lewit: Show in the snow.
Gabriel Lewit: Show in the snow. And then you have to say it 10 times fast.
Steve Lewit: Show in the snow. Show in the snow. Show in the snow. Yeah, that’s better than rubber buggy bumper.
Gabriel Lewit: No, that one’s too easy. Rubber buggy baby bumper. Rubber buggy baby bumper. That’s too easy, right? That’s too easy.
Steve Lewit: She sells seashells by the seashore.
Gabriel Lewit: That’s not a 10 times fast thing, okay?
Steve Lewit: Okay.
Gabriel Lewit: But yes, show in the snow.
Steve Lewit: Show in the snow.
Gabriel Lewit: I encourage you to try it. Now how did this happen? Well, my son decided one night it was snowing a few weeks back that he was going to go outside right before bedtime in his slippers and just stand out there and look at the snow. And my daughter was on the inside of our glass door looking out at him and she said, “You know, dad, it’s kind of like a show in the snow.” And then I was like, “Show in the snow.”
Steve Lewit: So, you made this up?
Gabriel Lewit: I came up with it, yeah.
Steve Lewit: This is great.
Gabriel Lewit: Inadvertently, Audrey came up with it. But yeah, I said, “Try saying that 10 times fast.” And turns out, it’s very hard.
Steve Lewit: She’s going to do great in college.
Gabriel Lewit: That’s all I’m saying.
Steve Lewit: Somebody should do something about that.
Gabriel Lewit: Let us know how you do with that as well. Love to hear if you can pull it off. Okay, with that in mind, have a wonderful rest of your day. We will talk to you on the next show.
Steve Lewit: Stay well, everybody.
Gabriel Lewit: Not in the snow.
Steve Lewit: See you. Bye.
Gabriel Lewit: Bye, guys.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode.
Prerecorded Voice: Investment Advisory Services are offered through SGL Financial LLC, an SEC Registered Investment Adviser. Insurance and other financial products are offered separately through individually licensed and appointed agents.
