By Whitney Webb, Managing Director, Head of Family Governance and Rachel Gil, Director, Family Governance
Current lifetime gift and estate exemptions are at an all-time high, allowing individuals to give up to $13.61 million tax-free to family members. These exemptions are set to expire at the end of 2025, leaving parents struggling with the question: to gift or not to gift? While the tax benefits are black and white, there is a gray area when considering the impact these significant transfers may have on the rising generation.
Additionally, the “scarcity effect” plays a role. Behavioral psychology studies show that limited-time offers can create anxiety for decision-makers, leading to suboptimal outcomes driven by the fear of missing out (FOMO). According to Aggarwal, Jun, and Huh’s study, “Scarcity Messages in Advertising: The Impact of Limited Availability and Limited-Time Appeals on Consumer Reactions,” the temporary availability of such a deal may cause decision-makers to act hastily.
Many parents come to us with the hope of their wealth positively impacting the family and family relationships, and fears of creating spoiled, entitled inheritors. There is no “right way” to transfer wealth to the rising generation. In fact, we have seen families successfully leave everything to their kids, passing down substantial wealth, and we have seen families successfully leave little to nothing to their kids while preserving strong, meaningful bonds. The key is thoughtfulness and intention.
We encourage those who are considering making significant transfers to their kids to consider the following questions:
- What are my greatest hopes for my kids and future generations?
- How do I define success for my kids?
- How are my kids already living out their definitions of success?
- How might wealth support my kids’ success? How might it hinder them?
- At what stage of life might it be best for my kids to access the family wealth?
- If I do not take advantage of the exemptions, what is the estimated decrease in wealth that will be passed down to future family members?
- How much am I being persuaded by the scarcity effect and the expiring exemptions?
- What factors, other than preserving financial wealth, are important to me and how do I weigh them against the financial implications?
We encourage families to take time to discuss these questions with their partners, trusted advisors, or even through journaling. Since there is no “right” answer, the final question to ask is, “Is this decision in the best support of my family’s culture, values, and priorities?” instead of simply asking, “Shouldn’t I take advantage of this tax break?”
Keep in mind that if you decide to transfer wealth to your kids, there are options to avoid full access to the assets, such as using trusts. Regardless of the structures, a clear communication plan is crucial. You don’t need to open the books and share all the details and amounts on day one, but it’s important to work toward full transparency over time.
Contact us for more strategies on discussing wealth with your children, and check out our “Money Talk” series linked here.
