Ep # 58: Using Your Money To Help Loved Ones

Benjamin Haas |

"One of the most heartening finding in this study is that the pandemic has led to a notable spark in generational generosity.  One in three (34%) adult Americans, 85 million people loaned or gave money to a family member or friend who was impacted by the pandemic" 

Source: https://www.edwardjones.com/sites/default/files/acquiadam/2021-01/Edward-Jones-4-Pillars-US-report.pdf

Have you ever gifted or loaned money to support a loved one? Are you considering gifting or loaning money to support a loved one?  Listen to this podcast episode to understand different scenarios for doing so and the things you should be considering.

  • Delineating between what is a loan and what is an outright gift - 1:38
  • Things to consider if it is a gift - 2:43
  • Being cognizant of if the gift is appropriate - 6:49
  • If it's a formal loan, there are some things to think about - 8:46
  • Why a loan makes sense - 12:28
  • Podcast recap - 16:07



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Full Transcript:

Benjamin Haas  00:03
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!  And...we're back! Welcome back, Adam. 

Adam Werner  00:30
Hey there. 

Benjamin Haas  00:31
How are you doing?

Adam Werner  00:32
Fantastic. How are you? 

Benjamin Haas  00:34
Great. Question for you. Have you ever been the recipient of someone's financial help? 

Adam Werner  00:44

Benjamin Haas  00:46
Okay. I would guess that a pretty...

Adam Werner  00:49
Have you? 

Benjamin Haas  00:52
Sure. I would guess and that's maybe the point that this is probably a more common thing than we think. Sometimes those we love or those that love us, there's a need for financial help in life. Life throws us curveballs or I've got family and friends that are willing to support. So we've come across this a couple different times in the last couple of weeks so we thought it was a great conversation to have today. Using our money to support a loved one but I think you and I would recognize that there are a lot of considerations for that kind of thing. 

Adam Werner  01:26

Benjamin Haas  01:27
Let's talk about it. Maybe not so much as the recipient but if you are the person looking to maybe provide that help. What that could look like? 

Adam Werner  01:39
Yeah, so there are like you said, that even within the past few weeks, we've seen different versions of this and I think the situations are always different. But I think the key for us is the delineation between what is potentially a loan that can help and then what is a gift, an outright gift that can help and there are very, very different ramifications for each of those. 

Benjamin Haas  02:12
Yeah, I love that so because let's be clear, too. We're not talking about picking up the tab at dinner here. Right? We're talking. 

Adam Werner  02:21
We're talking about yes, larger dollar amounts. 

Benjamin Haas  02:25
Yeah, paying off student loans, giving somebody help with a down payment for a mortgage. Other things, kids going through a difficult time in life. Want to financially support them.

Adam Werner  02:36
Yeah, putting an addition on the house or helping renovate the kid’s house. 

Benjamin Haas  02:42
So then I'd say let's start with the easy part and the easy part to me with what you said was the gifting world because at that point. We're really just thinking about maybe the same kind of idea of it's their birthday, I want to put a $100 check in their birthday card. Celebrate it, spend how you wish. Maybe you start adding zeros to that but the idea of just writing a tech check is no strings attached. That's probably the easier way to go about this but at that point, you also surrender all control. 

Adam Werner  03:18
Right, and so from that standpoint, if it truly is the parent and I guess we're assuming here in our scenario that we're working with the parents in this situation and helping them decide the best way to go about that. To your point, if it's an outright gift, then from our standpoint, it's just what's the most efficient place for those funds to come from to limit any tax impact, liquidity impact, investment impact, whatever that may look like. It truly just comes down to what is the most efficient route to make that gift happen financially.

Benjamin Haas  04:02
That's a great one. The other one that comes to my mind is, are there other people that need to be considered in that gift? So it could be a situation where I want to do this for my son but by the way, I've got two daughters over here. So does helping one obligate for the other. Fair isn't always equal. Equal isn't always equitable. I think we would want to help somebody kind of think through how does that feel? And how does that manifest itself in your specific situation because more often than not, we're dealing with somebody where there is that domino. It's not just hey, I want to do something nice if it's coming from a place of help. Well, if I help one, do I feel like I really should help the others even if those may not be in the same need.

Adam Werner  04:52
Yeah, and I think that's certainly the case here where you had said earlier the amount of zeros matter. The larger that help, the larger the gift and it's all relative but the more domino's there could be from like an estate planning perspective, let's say you are making a $50,000 gift to your son and daughter in law for XYZ reason, it doesn't matter. But you also have two other children to your point, are we also giving the other kids $50,000 a piece? And now we're all even and everybody's happy but if me as the parent, if I'm not in a situation to do that, then I have to start to factor that in or maybe not right, it truly is part of the conversations to make sure that yeah, those contingencies are again, I think he used the term domino's those next couple of steps that that's often where we start to plant those seeds because it's just not something that I think people really give a lot of thought to. It really is, I have a family member or a friend that needs help. I have the means and willingness to help them and match those things up and everybody's happy. 

Benjamin Haas  06:13
So I guess to be clear, the rule is that any one individual can gift $15,000 a year to another individual. We can start to say, okay, well, if I give to my son and my daughter in law and then my wife gives to my son and my daughter in law, we've really gifted $60,000 without crossing the annual threshold where you need to take an extra step and start to file, you know, returns for that. 

Adam Werner  06:39
Just to be clear with your example there, the $60,000. That's so $15,000 per person per year. Maybe you said that. 

Benjamin Haas  06:49
Yep. So that's the math. Let's get a little bit more complicated here in this gifting scenario. The only other thing we would really want our clients to be really cognizant of and this just popped into my head, I actually, I hope I say this right because it's not something I had prepared. We really want to think about, is it appropriate? And are we enabling. I'm thinking of a situation where my son doesn't qualify for a mortgage right now, maybe for a lot of different circumstances. So just giving them the down payment, really put them in a better spot? Or is that really just masking that there are some other financial things that maybe need to be corrected before they take this bigger responsibility. Are they able to handle that responsibility? We see situations like that that give us pause and then we have to have our responsibility, a little bit of an awkward conversation. 

Adam Werner  07:45
Mm hmm. Yeah. 

Benjamin Haas  07:47
But I think it's important. 

Adam Werner  07:50
Absolutely. It is. Yes. I'm glad you said that. 

Benjamin Haas  07:54
There could be other extenuating circumstances, somebody is going through a divorce so maybe there's complication there or somebody starting a new business and therefore, like banks are really skittish about that. And you would say, well, I really feel confident that their financial house is in order. Yeah, we would just want to be cognizant in the same way that we think about estate plans, leaving certain people money that maybe don't have great habits, to not enable those habits by not having them go through the responsibility of getting stuff in order. 

Adam Werner  08:24
So I know the other half of what we wanted to talk about, I have a transition here in mind to connect these dots but was there anything else you wanted to cover on the gifting side of things? 

Benjamin Haas  08:34
No, go for it.

Adam Werner  08:35
So then I'll use your example. It is helping friend, family member, whoever that needs to be on with a mortgage or a down payment, per se.

Benjamin Haas  08:45

Adam Werner  08:46
That's where I mean, you made the point. If it's gifting, then is that enabling or at least maybe extending some potential bad habits. The other side of this conversation is not, maybe it's not an outright gift. Maybe it is some sort of formal loan. I'm going to loan my friend or son, daughter, uncle, aunt, keep going. 

Benjamin Haas  09:12
Insert relationship here.

Adam Werner  09:16
It's the Spaceballs joke in my head. It's my brothers, sisters, uncles, cousins, roommate. 

Benjamin Haas  09:22
And what does that make us? Absolutely nothing. 

Adam Werner  09:26
Yeah. Friends. You can loan your roommate money for their down payment on a house but the point is, when it comes to that side of it and it's not an outright gift and it is truly a loan that is expected to be repaid at some point, that's where I think it gets that responsibility is a little trickier because now the one making the loan is on the hook for those funds and if you are expecting those to repay and they are not for whatever reason, have you thought through or at least do you have a plan in place? Is that money that you could do without? They're just so many dominoes to that side of it to make sure that you are protected in that situation. 

Benjamin Haas  10:21
Yeah, so situationally, if you are, maybe you're not the outright lender, if you're cosigning a loan, then you're taking on that liability of making sure that they pay it or else that's a reflection on your credit, on your obligations. I do think if you're going to lend money, you brought up two really good points that I want to highlight situationally. If somebody is having to pay you back, that should be documented and I would say that's for two reasons. One, you don't want to have to evict your child from your property but do have the conversation that it may be easier to just say to mom and dad, well, I owe you, I needed to pay these other things off first, and like, I missed one payment. I'm so sorry to get back to you. Yeah, the nature of the relationship maybe makes it easier to put you on the backburner but the second thing would be what if something happens to them?  It needs to be documented that this wasn't now just forgivable or that somebody else inherits now what you have lent them and that doesn't come back to you right there. There are many different reasons to formalize this type of help for others. 

Adam Werner  11:36
There really can be a countless number of scenarios that we can kind of create where it's the unintended consequences that you can't control beyond a certain point. It really needs to be well documented that at least have that plan in place on the front end with some of those contingencies in mind to avoid those potential headaches. 

Benjamin Haas  12:02
Well, let's be clear, it's our job to think about those things. You're going to lend money out of the kindness of your heart or you're going to get money out of the kindness of your heart, you're not thinking that my son's going to lose a job or my daughter's going to go through a divorce or some sort of other dominoes that’s going to happen that now you were trying to do the right thing, but it's created so many more headaches. So let us use our experience, let us use the things that we've seen go wrong to talk you through this.

Adam Werner  12:28
Yeah, so the happier side I think of this conversation and we can spend some more time there but where we see this or at least where we saw this recently, as everyone listening is painfully aware, the interest rates on savings at the bank right now are dismal. So it was a client that came to us, has a child, has student loans that are at a much higher interest rate than is comfortable. So pairing these two things together, excess cash sitting in a bank account not necessarily really earning any real rate of return, we could make a loan to our child, earn - throw out a number 2-3%, something that feels higher than zero but less than, you know, the 8-9% that they were paying. The child is saving interest, parents are earning some interest and everybody's happy. Like that there really can be that win-win scenario. But to get there like you said, there still needs to be a formally documented process to make sure that everybody is on the same page and that those contingencies are thought about in advance. 

Benjamin Haas  13:46
Perfect situation and I'll share that it's kind of for us the perfect couple and child for this because child exudes every bit of financial responsibility that we would all hope for in our children so the paying back is not something that's a concern, the schedule on which that will occur is not a concern. So yeah, that's well said. This is where all of these things come together in a really beautiful way that it's a win-win situation. So even there, I would say it's, you said it's documenting things. I want to think about the horrible in that situation too and it's not irresponsibility or a domino of what if they don't pay, still, what if something happens to that child before that repayment is made? It made up feel awesome to think about having an insurance on a child or something like that? Yeah, it really is not vastly different than when we have a young couple bought their first house. You try to match maybe that debt up with some sort of very cost-effective life insurance just to cover that what if something bad happens that now there can be the repayment of that. 

Adam Werner  15:03
A good point. 

Benjamin Haas  15:04
We'd want to bring that up. 

Adam Werner  15:06

Benjamin Haas  15:08
I think that low interest rate environment does present an opportunity with not just family members but I think we can see these types of things happening at the church. That the Church wants to do some sort of renovation and you're not making a lot of money over here. So maybe you make an agreement with the church that here's the $100,000 for this wonderful project, just promise to pay me back 3% and over what period of time. Trying to think creatively on how this low interest rate environment can work for people that are willing to help, families and organizations, with their savings? What else you got? 

Adam Werner  15:58
I'm staring past my screen at some notes and I think we hit on most of it. 

Benjamin Haas  16:07
So then let's just maybe reiterate a couple themes here and things to think about. The first one you brought up, is this a gift or if it's a loan, right, the gift being outright is a little easier. Loan is I think, going to take a little bit more structure, a little bit more documentation, maybe going down that rabbit hole of a couple different what-ifs but I think it all comes back to helping is a wonderful thing. Make sure you're taking care of yourself first. You're being efficient on how you help and then we'll just work out the logistics but hopefully it benefits all parties. 

Adam Werner  16:43
Yes, agreed. Well said. 

Benjamin Haas  16:47
Until next time, have a great week. 

Adam Werner  16:50
You too. Thanks. See ya.

Benjamin Haas  16:55
Bye. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in this show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney and your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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