Get Paid Last
Owners wait
Disclaimer / Disclosure I am long SPY and Frec.
A first lesson I told my kids about equity is this: owners get paid last. Both operating business owners and shareholders. We pay salaries, we pay bonds, we pay suppliers. We wait. Only after everyone else first gets paid do we get the leftovers. Sometimes there are no leftovers. Other times there are some. Occasionally there is far more than we deserve compared to the work we did or the risk we took. We eat last.
Since I was born in the ugly brown and orange under bathed 1970s, it has been hell for wages but heaven for profits. The left has always whined that “the rich get richer while the poor get poorer”. Whether or not they are right in absolute terms, their rightness in comparative terms is just arithmetic. Compound growth compounds. If you consistently owe a little over time you will owe a lot. If you consistently grow a little over time you will have grown a lot. There is no way for linear wages to keep up with geometric profits.
I want my kids to be whatever they want to be. But whatever that is (so far between the lot of them they have considered being: a princess, samurai, Spartan, monkey, dad, gorilla doctor, ice dancer, and investor) they should be owners. When I first overheard the cliché “he acts like he owns the place” it occurred to me that I quite literally always wanted to own the place. I also heard similar about “on steroids” and “he gave them some real red meat” – why do people toss around such clichés without buying equity and eating steak (along with whatever performance enhancing drugs best serve their needs and goals)? Own the place. Then walk around however the f you want.
To that end, my <18 kids are all getting the new $5k/year Trump accounts. Yours should too. They are good on one of the very few things under your control: tax efficiency. Taxes are deferred, so they can compound for years or decades without paying. Tax advantaged accounts should cause no rumination. It is simple: max out all of them – IRAs, 401(k), 529s (regardless of educational needs or expectations), and ultimately OZs and PPLIs. Take the tax savings money. Figure out the use later. That is a smaller and utterly solvable problem.
As for >18 kids: direct indexing. When they’re 18, they get a direct index. There are two ways to go about this under the gift tax exemption. First, you can start with a classic direct index. But the strategy works far better long/short with leverage. The 2026 gift tax exemption per couple to each kid is $38k, which works with the classic direct indexes. However, you can also go straight to my favorite option, the 250/150 S&P 500 (SPY) long short fund. Based on history, a $500k (fund minimum) investment will generate ~$365-450k of losses over the next three and a half years for a rather significant tax advantage. The range is largely dependent on volatility but can harvest losses regardless of the market’s overall direction.
How to avoid the gift tax (I am not your advisor so sure as hell am not your tax advisor – do your own work, think for yourself, buyer beware, hire actual licensed advisors, and feel embarrassed if any of that isn’t obvious and shouldn’t go without saying): lend them the money. Gift the interest. At the current 3.93% applicable federal rate which you must charge to make it a real loan, you can lend $968K per kid. Those over 18 can put $500k of that into the best direct index for loss harvesting.
Caveat
Skills matter more than stuff. In any domain, what matters most is one’s behavior, habits, and decisions. So if you give them $0.01, make sure that they know what to do with it. The last thing we need is rich morons, especially those enriched by capitalism who would use its bounties to tear it down.
Conclusion
In a wild world with many variables beyond your control, tax efficiency is one you can do something about. So do something about it.
TL; DR
Kids <18? Trump accounts. Kids >18? Frec.