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Practicing Significance Glorifying God by fulfilling your own unique purposes through the never-ending action of acquiring, using, and sharing diverse resources. |
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Family Gifting
“Opportunities are seldom labeled.” John A. Shedd
“He is no fool who gives what he cannot keep to gain that which he cannot lose.” Jim Elliot
“No good deed goes unpunished.” Clare Boothe Luce
“I was born with a plastic spoon in my mouth.” Dennis F. Smith
Introduction
Family gifting is a subject that has historically been of interest primarily to affluent people. However, to optimize our family relationships and to take advantage of tax laws and medical care laws, it is a subject that should be understood by all of us.
Why Give a Gift?
It is not intuitively obvious that we should ever give a significant financial gift to a family member. Many affluent people have chosen to give nothing to their family members in hopes their characters will be better developed. However, most of us seem to assume that we will give gifts to our family members if given the capability. Some specific reasons might include:
· Allow the recipient to enjoy a better life-style or have a great experience.
· The potential recipient has a special need which you can meet.
· Optimize the giver’s estate taxes or income taxes
· Start funding future education expenses of the recipient.
· Guilt by the giver.
· To see how the recipient reacts with a small gift before a larger gift is considered. May also provide the giver a chance to start a teaching process for the recipient.
· A gift needs to be made by the child because an aging parent is in need.
· A gift needs to be made by an aging parent to children to reduce assets so the parent can qualify for certain government programs.
· An elderly parent or friend has medical expenses which need to be paid.
· Help the recipient establish an IRA.
· The giver wants the recipients to join in on an expensive travel experience. Many families find travel memories to be much more valuable than money.
An interesting example of a gift is one that was given to me by my father. Just out of college my father gave me $5,000 to invest in the stock market. I remember telling him that I didn’t know what I was doing and that I might lose the money. He replied, “You will either learn about the market before investing, or you will lose all the money and learn from that.” That gift and his reply resulted in my having a life-long participation in the stock market and have given us a common area of interest to talk about.
Federal Tax Impact
Briefly, there are three primary tax thoughts to keep in mind concerning family gifting:
· In 2004, an individual can give $11,000 in cash or value per year to as many people as desired without incurring any federal gift tax. For instance, a husband and wife could give a total of $22,000 per year to each of their three children and two grandchildren, for a total of $110,000, without incurring any federal gift tax. The $11,000 amount is scheduled to increase in the future. This amount can be effectively increased by paying for someone’s medical or educational costs. These payments must be made directly to the institution.
· In 2004, an individual can give away an additional $1,000,000 during life or at death without incurring any federal gift tax. This amount is scheduled to increase.
· Spouses can gift an unlimited amount to each other during life or at death.
Effective Gift Giving
Some factors to consider concerning effective giving to family members are:
· Is the gift a one time act, or part of a long-term plan? Family gifting is an important part of estate planning for affluent people. Estate planning and gift giving are interdependent in many cases. Gifts may include insurance, family limited partnership interest, or various types of trusts.
· Is it possible that the gift might prove to be harmful to the recipient or that the recipient is too young or immature? If so, a trust should be considered, or at least use of an account labeled as a Uniform Gift to Minor.
· If education is to be an issue, consider setting up a tax advantaged account such as a 529 college savings plan.
· Is it possible that tax benefits can be derived by giving away either income-producing assets or highly appreciated assets?
In our affluent society, many people are reconsidering the appropriate levels of gifts to give to family members. In general, children of the last two or three generations have been raised with more material goods than their parents. This has engendered certain expectations and work ethics in the children. Yet, it is an aspect of parenting to decide what is good for children, whether the children are 6 years old or 60 years old, regardless of that child’s expectations. For that reason, it is recommended to periodically update your estate plan and your giving plans to make sure that you won’t be giving too much to your children. In an informal survey, I have asked many people, “If you were a billionaire, how much money would you leave to each of your children, and how much would you give them each year now?” Invariably people want their children to be independent and have good self-images, which require adult children who are not unduly dependent on their parents or waiting for their inheritance. The typical answer, then, is “not much now, and no more than some amount at death.” Yet, when pressed on their current actions and estate plans, many affluent people will actually be giving their children much more than they rationally think is good for the children.
Benefits and Detriments of Gift Giving
It would be advantageous to maximize the giver’s and recipient’s enjoyments and benefits, while minimizing the “damage” to the giver or recipient and/or their relationship. There is a sadly ironic saying from Clare Boothe Luce, “No good deed goes unpunished.” Unfortunately this is often true when giving gifts, even among family. This may happen for a variety of reasons. In some cases, there may be an implied indication that the giver is in a position of superiority over the recipient. This could cause a range of negative responses from the recipient. In some cases, the recipient is not experienced or mature enough to use a gift in a positive manner. In some cases, the attitudes of the giver and/or recipient may not be appropriate. In an effort to maximize the benefits of the gift, it may be advisable to make sure that any “strings” or expectations are specified at the time of the gift so the ground rules can be set and misunderstandings eliminated. One way that this can be accomplished, while also leaving a paper trail for tax purposes, is to write a letter at the time of the gift. Also, it is helpful if parents can talk about giving issues to children as they mature so that giving and receiving are seen as normal, pleasant aspects of life.
Another situation that is becoming increasingly familiar is the case of parents who do not inform their adult children of their estate plans. This can cause a lot of problems for both the parents and the children. In one of those classic relationship problems, neither the parents nor children are at fault, yet the outcome is far less than optimal. The parents correctly have the right of privacy and confidentiality, and don’t want to have an unpleasant confrontation or negatively impact the behavior of their children. They often just want to avoid the situation altogether. The children miss the opportunity to be taught about financial and estate planning, and may be making inappropriate plans because of false expectations. The solutions vary, but good communication and education is probably going to give the best long-term solutions. None of us want to have children who look forward to our dying just to get our financial resources such as the man I saw on TV who said, “I am a waiter. I’m living beyond my means now and just waiting for my parents to leave me money.”
One way to help educate adult and non-adult children is to develop a written personal financial philosophy. By including all family members in the process, you can guide the education process and manage expectations at the same time. This written philosophy could also be used to guide the executor of your will, the trustees of a foundation, or your children about your intentions after you die. In your written philosophy it would be good to talk about such things as:
· How your wealth was acquired.
· How you would like your wealth to be preserved or spent.
· What obligations you feel.
· How you want your children to be involved.
· How you feel about leaving money to family members instead of donating it or paying estate taxes. Include the psychological effects on family members.
· What kind of organizations you want to help.
Conclusion
There are many considerations when making a gift to a family member. When the gift is made ineffectively, both the giver and recipient are in danger of being harmed. When the gift is made effectively, both the giver and recipient will be blessed.
Additional Resources
Don’t Just Give It Away, by Renata J. Rafferty
You’re Fifty – Now What, by Charles Schwab
Wealth in Families, by Charles W. Collier
Family Wealth, by James E. Hughes, Jr.
DISCLAIMER: The content presented herein is presented as general information and is not intended to be a comprehensive overview of all of your financial options. Nor is it meant to imply any endorsement of any type of financial plan, product or service. Investing and spending money is a complicated and serious process that is constantly affected by conditions in the marketplace and changes in tax law and government policies. There is no guarantee that an investment product bought today will perform the same from year to year. You should research your choices as thoroughly as possible and, when in doubt, consult a trusted professional advisor.