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Wednesday July 24, 2024

Personal Planner

Integrity and Initiative

Integrity and Initiative

Pat and Allen were talking about their three children. They are empty nesters and the three children are off making their way in the world.

Pat: "I've been thinking about our three children. They are all doing fine, but we want to make sure that the inheritance we give them helps them to be better people. The inheritance some of our friends gave to their children was substantial, but the children just didn't use it very well. In fact, when an uncle of mine passed away, the inheritance was used very poorly by his children."

Allen: "But how do we make sure that the inheritance for our children leads to a good result? We need to do some research to make sure that our plan works effectively."

Pat and Allen did their homework. They read articles and spoke with several advisors, seeking wisdom. The result of their study is an inheritance plan that helps the child to be a better person. It is summarized as the "Integrity and Initiative" plan.

Goals of Parents

Your primary goal as a parent is to help each child be a successful person—not just financially, but also in his or her career, family life and social status. While attorneys and CPAs are trained to help you transfer property to children, a good inheritance plan is much more than just transferring property. As Pat noted, there are many plans that are successful in transferring property but lead to a very bad result.

Yes, a successful plan transfers property. But good planning transfers it at the right time, the right way and in the right amount so that it achieves a good result. While a good result cannot be guaranteed, the "Integrity and Initiative" plan will increase the probability of that favorable result.

Time to Learn

The first strategy of the Integrity and Initiative plan is to spread the resources out over time. This gives children some time to learn.

Parents have usually acquired an estate over 20, 30 or even 40 years. If you ask a person of retirement age to recall their early years, they will frequently share stories about the challenges they faced. For most people of retirement age, those challenges were financial "bumps in the road" that were very educational. Without that education, they would not have been as successful in life or in their finances.

Children who will receive a substantial inheritance also need time to learn. An inheritance can be stretched over a period of time. This may enhance the overall probability that the inheritance will facilitate development of integrity and initiative.

A good "Integrity and Initiative" plan could transfer property in four ways:

1. Gifts during life

2. Principal after the parents pass away

3.Income for a period of years

4. Delayed principal

Gifts During Life

When should a parent start making gifts to children? The easy answer is as soon as the children reach the age of financial responsibility.

But what is that age? That will vary, but most children in their 30s, 40s or 50s do reach that point of maturity.

At that time, parents frequently start by making gifts using the annual gift exclusion. This exclusion amount may be gifted with no tax or reporting to the IRS. The annual exclusion in 2024 is $18,000 per child and is adjusted every two to four years.

Generally, it is better to give property rather than cash. Cash tends to be spent fairly quickly. Regular gifts of cash may result in a child acquiring a taste for expensive items that are above his or her normal lifestyle. This can lead to problems later on in life.

By making gifts of stock, land or other types of property, parents encourage children to invest and build their assets. Therefore, a good gift is a gift of property.

Principal When the Parents Pass Away

The second gift strategy is to transfer principal after both parents pass away. This can be a bequest from the estate of the surviving spouse. The principal could also be a distribution from an insurance trust that pays to the children after both spouses have passed away. The transfer of principal could be a specific property such as a home, land or securities or it could be simply a portion of the estate.

Income For a Term of Years

A very popular third option is to create a trust that pays income for a period of 15 or 20 years to the children. For larger estates this is usually a charitable remainder unitrust. The trust is funded after both parents have passed away. It pays a 5% or 6% annual income to the children. In many cases, it is very advantageous to fund the trust with an IRA or other qualified plan. The trust earns income for the family for the selected number of years. At the end of the 15 or 20 years, the trust is then transferred to favorite charities.

The combination of some principal and income for a term of years is very helpful. Parents can treat their children equally; however, there are some children who may require a longer period of time to mature in their financial management. The combination of principal and income for a period of years allows these children the time to learn better money-management skills.

Delayed Principal

The fourth option is an additional payment of principal when the children have become more mature. Following the expiration of the payouts for the unitrust term of years, an additional amount can be distributed. This frequently is done through the "Wait a While" trust. Your attorney may have another name for that trust—the charitable annuity lead trust.

For the term of years that the children were receiving unitrust income under the third part of the plan, the charities receive the payouts from the lead trust. After the unitrust income payments have been made to children and that trust terminates, the children receive their delayed principal distribution from the lead trust.

Keys to Successful Planning

A successful Integrity and Initiative plan is created by understanding the four transfer options and then setting goals. These goals will frequently include a target amount for the inheritance for the children at each level. In addition, it is useful to create a total inheritance target amount per child.

For example, one parent wanted the children to receive $50,000 each year in income. Because a unitrust funded with $1,000,000 paying a 5% payout produces $50,000, she decided to set up a unitrust of that amount for each child.

Over the 20 years, the trust paid more than $1,000,000 as income to each child with the remainder then distributed to charity.


Allen and Pat carefully thought through the four different options. They established the overall target inheritance number for each child. After learning about the different options, they decided to use the first three options. With a combination of gifts during life, some principal from an insurance trust when both parents pass away, plus income from a unitrust for a term of 20 years, they were able to achieve all of their objectives.

Pat concluded, "We now feel that we have a much better plan. We are not just transferring property to our children, but we have carefully thought through the ways in which the inheritance will help the children. With the combination of gifts during life, some principal, and then income for a term of 20 years, we are giving our children the best possible opportunity to develop integrity and initiative."

Published August 4, 2023

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