…With Your Family and Yourself

We frequently work with clients who are inter­ested in financially assisting the younger gen­erations in their family. This may mean offering to help children or grandchildren with specific expenses like buying a house, paying college or graduate school expenses, or assisting with new business start-up costs. It may also mean making annual financial gifts to family members or taking your extended family on an annual vacation. Sometimes, a client will find them­selves financially assisting an adult child through a period of unemployment, a divorce, or a medical crisis.

In general, there appears to be a trend towards sharing wealth while the giver is still alive and can enjoy seeing their family members benefit from their generosity. Oftentimes, the gift recip­ients are in the earlier stages of their careers or may be newly married and have young children. Money may be tight and they may have a real need for some financial assistance to buy a house or jump-start a child’s college savings account. While this phenomenon of sharing wealth while the givers are still alive is often a win-win for the givers and the receivers, it also has the potential to be risky and may raise some other concerns. For example, it is important to make sure that your willingness to share your wealth with your family members does not jeopardize your own financial security. You have worked hard and planned carefully for a long and comfortable retirement. Financial gifts you make now can reduce the assets you have to rely on later in life. Thus, you will need to avoid over-gifting and protect your own financial resources.

Clients often ask us how they can manage or balance these competing and maybe even equally important priorities — being generous with family members and maintaining their own financial security. With open communication and an awareness of tax implications, you may be able to provide the help you want to give in a way that works for your recipients and for you. Below are some tips and considerations that can help you better evaluate and analyze whether or not it is prudent for you to share your assets with family members and to what extent.

Assess Your Situation

“Secure your own oxygen mask first before as­sisting other passengers” is an instruction every frequent flier knows by heart. It also applies to your finances. Have you reviewed your retire­ment and estate plans recently? Are you seeing the opportunity for assets you had earmarked for transfer later (upon your death) to instead be given today?

Your financial advisor here at BLB&B Advisors, LLC can help you explore how parting with certain assets now might affect your future financial independence. Together, you can assess and evaluate what your financial future might look like if you pass assets along to your family members while you are alive and also discuss options for minimizing the impact of removing those assets from your nest egg now or at some point in the future. Ensuring your own financial security should be your top priority. At the end of the day, you do not want to end up being financially reliant on your family members as you age. However, this could happen if you give away too many of the assets you have earned and acquired over the years and do not have an adequate cushion of savings over and above what you think you will need to get through retirement comfortably. Unexpect­ed or chronic health issues as you age can be extremely expensive and it is much safer for your retirement plan to assume you will need funds available to cover this or a similar type of event.

Ongoing Communication with Your Family Members Is Key!

Communication about money is critical within families. However, money issues among and between relatives can be a very sensitive sub­ject. Also, you should not assume that the same gifting approach for each recipient is appropri­ate. Assume, for example, that you are consider­ing sharing some of your money with your three adult children while you are still alive. One of your children may be struggling financially while the other two may be financially secure. Maybe one of your children is significantly younger than your other two children and thus is just starting their working career while the other two are well-established in their careers. Or, maybe one of your children is in the process of getting a new business off the ground and could use any financial assistance you are able to provide.

Once you have established limits for yourself on your ability to give, share this with your family members and let them know the help you would like to offer. Invite them to also talk with you about their needs.

Is what you are being asked to support in line with your priorities? If you value education and are committed to developing your granddaugh­ter’s academic talent, you may want to offer to pay tuition directly to her school rather than giving a lump sum of cash to her parents.

If the conversation has not come up yet, but you have seen a need or simply want to share wealth during your lifetime, prepare for a longer discussion. It may take a few conversa­tions with family to figure out exactly how they are comfortable being assisted and how you can appropriately supply that assistance. One strategy we have seen work with many families is two-pronged and involves sharing some assets with family members during the giver’s lifetime and the remaining assets upon the giver’s death. One important benefit to this approach is that it helps ensure the giver will not run out of money before death as certain assets are purposefully being withheld and not gifted during the giver’s lifetime. If necessary, the giver can still rely on these assets to live. Often, the giver initiates the giving process by making relatively small annual gifts to their children. Over time, and assuming the giver’s financial resources remain intact, the size of the annual gifts may increase. All the while, though, the giver retains assets that will then be transferred upon death.

Pride and a sense of independence can play an important role here — on both sides. Before you start the conversation, recognize you may have differing values and consider how those might influence your decisions about giving.

Consider the Tax Implications

As tax rules change, it is important to work closely not only with your financial advisor here but also your tax professional. You want to make sure that any gifts you make do not trigger an unexpected tax bill. For 2016, and pursuant to IRS regulations regarding gift tax exclusions, you may make annual gifts to individuals of up to $14,000 each, while a married couple can make gifts of up to $28,000 to an individual without triggering any gift tax. Thus, if you and your spouse would like to assist your daughter and her spouse this year together you could gift them up to $56,000 without incurring any gift tax obligations.

It is important to note that in addition to these annual exclusion gifts, you also have the ability to gift $5.4 million ($10.8 million if you are mar­ried) during your lifetime or upon your death, free of estate and gift taxes (although this may require additional tax reporting). Noncash gifts such as securities or real estate could also be given instead of cash.

Medical expenses and tuition bills paid directly to the institution or service provider are tax-free and don’t count toward your annual or gift tax exclusions, according to IRS rules. Also, please do not forget that your gifts do not only need to be monetary. After talking with your family, you may discover that offering your time is what is really needed. Regular child care to working parents or lending your time and expertise to helping a grandchild apply for college schol­arships can be invaluable. These do not cost money but can buy your family real peace of mind.

With the right planning, you and your team of financial and tax professionals can develop a gifting strategy that is likely to achieve your desired goals without putting your finances in jeopardy.

*Please note that BLB&B Advisors, LLC does not render tax or legal advice.

Talk With Us About:

• Reviewing your current and long-term financial picture and estate plans, focusing on assets

• Communicating effectively with family members about the wealth you would  like to share

• Working with a tax professional to make sure financial gifts do not trigger additional taxes