Welcome to To Your Wealth, a simplified, weekly, personal-wealth Q&A! Sometimes you just don’t know what you don’t know…Or perhaps you just have that one issue keeping you up at night. Either way, every Tuesday, we’ll be answering one of your personal finance questions, so be sure to keep those queries coming. Click on Submit a Question below, and then keep an eye out for when your question will be featured!
1. I’ve created a trust fund for my kids. When and how do I tell them?
To Your Wealth - March 5, 2019
It’s difficult to pinpoint the perfect moment to have that conversation but there are certainly some prerequisites. First, make sure your children have demonstrated an understanding of personal finance topics such as budgeting, saving, and debt. Other indicators that your child is ready to know about your generous gesture may include maturity, responsibility, and work ethic.
Once you’ve determined your child is ready to know, let the trust language tell the story. Make sure they understand whether there are restrictions on when or why they have access to the money. For example, a trust may be earmarked for the down payment on a home or the funds may become available once the beneficiary graduates college. If the recipient has free reign on trust assets, be sure to communicate your expectations, whether it be entrepreneurship, philanthropy, or other guiding principles that will help them be good stewards of your hard-earned wealth.
2. My family member recently passed away and I inherited their estate. Will I owe taxes on my inheritance?
To Your Wealth - March 12, 2019
It’s very unlikely, but it depends. There are three possible taxes involved. The first is estate tax, which is levied at the federal level. If the value of your family member’s estate is under the lifetime exclusion ($11.4M in 2019) then you’re in the clear. If their estate is above the exclusion amount, your inheritance may be reduced by the amount of estate tax owed; however, the tax won’t be paid out of your pocket.
The second possible tax is charged at the state-level. There are six states that still charge inheritance taxes on the person receiving the inheritance. Check the rules for the state in which your family member lived and owned property.
Lastly, some assets have capital gain tax or ordinary income tax implications. For example, if you inherit shares of a stock you will owe capital gain tax if you sell the stocks at a gain. If you inherit an IRA you will owe ordinary income tax on the Required Minimum Distributions and other withdrawals.
Taxes can get confusing. Consult with a tax professional if you’re still not sure whether you will owe Uncle Sam.
3. I own my own business. Can I hire my teenage children to work for me?
To Your Wealth - March 19, 2019
Yes. Hiring your teenage children can prove to be a useful tax strategy if you play your cards right. Your child won’t owe taxes on earned income up to the standard deduction ($12,000 for single filers in 2019). Depending on how your business is structured, there may be additional deductions and tax strategies in your favor.
Be careful. The IRS requires business owners to provide reasonable compensation to working children for meaningful and helpful work related to the business. Chores like mowing the lawn or doing the dishes do not count. Treat them just like any other employee: fill out the necessary paperwork, leave a paper trail, keep track of their hours, and follow labor laws.
Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.