Ep # 72: Giving While Living: Helping Family Beyond Just Writing A Check

Benjamin Haas |
  • Our role in helping people through planning to understand what gifting is possible while living - 2:19
  • Thinking about timing, what type, tax implications, and the end result you're hoping to achieve - 3:41
  • Considerations when gifting - 7:37
  • Creative arms length ways to gift - 9:51
  • Gifting securities - 12:54
  • Building a legacy by passing along good behaviors - 14:01
  • Caveats to gifting into an IRA for someone - 18:56



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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 of 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! Hey Adam.  Happy opening day for Phillies baseball.

Adam Werner  00:31
Yeah, I know that and I can see that. I can see you're wearing your Philly pullover?

Benjamin Haas  00:39
Yeah. I'm shining. It's a beautiful day in Pennsylvania. Happy to see baseball's back.

Adam Werner  00:48
Yeah, it's always like the beacon of spring even though it may not play and go like it just yet. It's going to be here soon and that excites me to no end.

Benjamin Haas  01:00
Beautiful. All right, in podcast world, what's on the docket?

Adam Werner  01:04
So I'm not sure how we make a transition from baseball to this topic, there's no segue, I got nothing. We get asked a lot from our clients and even some people that we meet for the first time. I think a general theme for the people that we work with is charitable giving and we've talked about that in different iterations in the past. But that's always been through the lens of, how do I reduce my taxes and how do I give to these charities that I want to support? Different aspect of that is, how do I help my family and maybe my friends on a more personal level? Are there different ways to go about that? How do I know if that's even something I should be doing with my money? How do I know that I'm okay before I can, you know, help others. It's the old you're on the plane and the masks come down from the ceiling, you're supposed to put it on yourself first before you put it on your kid. 

Benjamin Haas  02:03
Yeah, for sure. 

Adam Werner  02:04
Take care of yourself first before you can help others. So that's kind of the thought exercise here for us is if somebody wants to help loved ones, how do they go about that process?

Benjamin Haas  02:19
Yeah, I love this conversation because I do think it's one of those that you see your clients like eyes light up because as we start to talk about those ideas, it is kind of recognizing that to most people, I think the idea of gifting whether it's to charity or to family, you picture picking out that Hallmark card, right? A holiday or a birthday and it's like I'm going to I remember, as a kid, grandparents put a $20 bill in there. You can do whatever you want but we would want people to think much grander than that the different ways that you can really financially support somebody and maybe that's a better way of putting it, that's not that check in the Hallmark card. You hit the nail on the head, I think it's our job when we get our clients that phase of life to go, here's what you need, here's what we're comfortable you need, and if there is some excess and you have some priorities that are, I'm going to default to helping grandkids. Reinvigorated by new life. What are the ways that we can talk to you about doing that? And it starts, I think you and I should start reflecting what that client relationship looks like. What are the different things that they may prioritize because the answers to that are going to lead them into the financial planning dominoes and conversations we need to have so I would say we start with priorities.

Adam Werner  03:41
Yeah, and right off the bat, ah, baseball reference. That was unintentional. Right off the bat. I think the key, one of the key delineations is the timing. So is this something that you would want to see the impact of while you are living. Then that's a very different conversation, then I want to leave a legacy for my family or my grandkids but I want to make sure that I live my life and then whatever's leftover, great that can then go to these people. But I think that's a clear difference in, I mean, completely how we would approach that situation. If they would like to see and I think that's the majority of this conversation is we want to be able to see the impact of our, I was going to say of our charity, but yeah, of our giving to family now, to be able to see and feel that emotional impact on the front end. So the timing, when do you want to give that and gift is number one.

Benjamin Haas  04:48
The other one that pops into my mind is some sort of degree over control. Like are you really wanting to dictate what that is used for? Also over what period of time. There are different ways that we would go about talking about that, which I'm sure we'll hit on as well. 

Adam Werner  05:10
Trying to think of another one. The tax side of things always will factor in to some degree. So we can kind of get into those details depending on the idea of what they would want to do or I guess, different ways they could go about giving, what is that goal? Or what is that end result that they're hoping to achieve?

Benjamin Haas  05:37
Yes, some of this just like tax avoidance or getting money out of an estate. Yeah, we're going to probably get a little bit deep into the weeds here but I think the other thing that you and I would want to kind of reference, the human side of what we do is to try to figure out really, again, what are they looking to accomplish? And it may not just be monetary. It may be, are you paying for something that's providing an experience? Are you taking a trip with them? I'm trying to think of other client situations, maybe you've got some that are popping into your head. 

Adam Werner  06:12
Yeah, I'm thinking of a client in particular that shared that they no longer do birthday gifts for the extended family. They take that time, they pick a date near that, whatever that celebration date is, and they go and do something together. They experience something, whether that's this specific example, if she's listening, she'll know. They went out, they all rented four wheelers and they went four wheeling through the mud as a family and that was just a completely out of left field kind of experience. But it's something now that is a memory for that family as opposed to writing a check for a couple 100 bucks, and hey, happy birthday, it's just a different way to go about it.

Benjamin Haas  06:57
Yeah, we're doing this Disney trip. I'm thinking of the other client who, hey, they put the pool in and now they want to make a nice, like patio area that we can all experience as a family. So yeah, totally different. This is great, different ways to make sure that we're meeting those primary objectives if I want to help my family or want to do something nice for them and again, under the guise of it's not just writing a check so let's jump into it. Like if we start to go through some of those priorities, what are the ideas that we've come across or that we've even shared? And then this is a financial planning podcast, what are the things people would need to consider with that? I'll let you start. 

Adam Werner  07:36
Yeah, the first one that we had kind of noted and it somewhat flows with kind of the experience side of things, is helping either pay for a child or a grandchild, college education and I think we definitely did a podcast on grandparents and 529 plans in the past. But that is kind of that idea of just writing a check to the person and they can kind of go spend it however they want. There is a specific kind of thought on this is if they're going to go to college and there's higher education expenses, I can help take some of that weight off of that expense, but there are different ways to go about that. So, we kind of talked about it, the 529 College Savings Plan type of accounts, there's pros and cons to using that and maybe we'll just link to that other podcast to get to for people to dive into those details. But I think one of the other maybe the lesser-known gifting rules. So you can give anybody a gift at any point in time and that limit now is $16,000 a year where you don't have to file any, you know, additional gift tax returns, there's no additional kind of disclosures that are needed. There are no taxes that go along with that. If you want to gift over that amount, then you start to eat into your lifetime annual exclusion, exemption, exclusion? I should know these things as a CFP, what's the IRS terminology? 

Benjamin Haas  09:09
Yep. Sounds good. 

Adam Werner  09:10
Doesn't matter. Then you have to go through that formal process of you know, filing a gift tax return, all of that fun stuff that comes along with that. All of this to say, if you pay that tuition bill directly for that person, child, grandchild, whatever that may be, that completely excludes the gifting process. That is not considered a gift, which maybe Congress and the IRS will wise up to that at some point and close that loophole, but for now, it is wide open. That is a way to avoid those caps on what you can give and you again, can clearly see the direct result of helping somebody cover those expenses in that way.

Benjamin Haas  09:51
Yeah. Is it not the same for medical bills? I believe it is. If you directly pay a medical bill to an institution, that is not considered a direct gift. So yes, again, we're maybe outside of very specific common situations. But yeah, if you are aggressively gifting, maybe we're talking about somebody now that has significant wealth or came into significant wealth, these are good ways the IRS looks at those as nice gifts that do not need to be filed and that's a wonderful thing. Yeah, the flip side sticking to like, paying for certain things. We, I've certainly come across situations before where I'll gift money to make a down payment on a home or I'll gift them to be able to do this. In an environment, you know, maybe even coming out of COVID, where it's a little bit different, more difficult on the lending side of things. There aren't as many properties, it's very competitive situation, I can see situations where we would have clients that their way of helping maybe to be the bank. To provide some sort of low interest loan to a family member, which by the way, feels pretty good for you because in the environment we're in right now, conservative investors, bonds under pressure, rising interest rates, all these things make it very difficult to safely try to collect 2, 3, 4 percent. Maybe you can become the lending institution, there are dominoes to that. I can think of a triple negatives right off the bat. I'll let you throw them out there but the idea, of course, is I'm helping them but I'm getting the benefit of some sort of low interest coming back to me as well and that's what makes it legal. The deal has to be considered arm's length; you have to be charging a fair interest but that can be the best of both worlds for everybody.

Adam Werner  11:49
That often can be a Reese's Peanut Butter Cup of working with family. To take your chocolate and peanut butter, everybody's happy, what can go wrong? But yeah, you thought about it or noted it and I started thinking about it. I'm sure everyone listening was thinking the same thing. Making loans to family, there's probably some members of your family that you'd be more than okay doing that with, but maybe not everybody. You can start to play those roles and scenarios that this may be an uncomfortable situation. So yeah, you'd really want to make sure you have it documented. I guess that's one of the key points is that it is an official loan and that there are some protections built in because I guess that is the risk. You acting as the bank means you also have to do your due diligence. You kind of have to do some underwriting to figure out if you make this loan and something doesn't go according to plan that can very quickly ruin a relationship and if it's with family, that could get ugly pretty quickly.

Benjamin Haas  12:53
Thanksgiving’s not going to be comfortable. I think one of the other notes that I wanted to make, just go back to the investment side of things that much like we were saying, people kind of think about gifting cash, there is and can be personal benefits to gifting securities. To be clear, we're not talking about IRA dollars. Maybe that can be a separate conversation on people that have to take RMDs and then what's the net result of that. But if you have investments outside of those retirement accounts, there may be something to you gifting that to somebody else and I'll use the first example where I kind of like this. Maybe it is with grandkids, where you're now becoming the educator. Here's how wealth can be built that you don't just have this money to now spend. Watch this compound, you know, let's look at this Disney stock together every year and see how it's going. I know that we've come across those situations where the building of the legacy is also to make sure that you are passing along your good behaviors.

Adam Werner  14:02
So not only that but think of how many older clients that we have that still have legacy stocks, mutual funds, that they still continue to hold for that very connection. Right, there is the sentimental value of investment that's been passed down. Yeah, I'm thinking of one in particular that we just recently brought over and yeah, we're not going to transact it because this came from father, grandfather, you name it and that was to your point, there is a lesson in that. Very different than just again, writing that check, paying for college, that's all great but instilling in them that savings and you invest this money and you can see now and grow over time. That's a lesson that goes a long way we would hope.

Benjamin Haas  15:27
So, two thoughts come out of that first, one of the downsides to that is if you're going to give something that's already grown, then they are going to assume the cost basis; what you purchase that and that they sell it in the future, they're going to have to pay all those gains taxes, maybe not a huge deal but to be clear, if they inherit that from you after you pass away, that gain goes away. They get what's called a step up in basis. So that's one of those things we'd want to just make sure we're weighing pros and cons on but second, I'm sorry, go ahead.

Adam Werner  16:05
Yeah, so all I was going to say there is sometimes even if the thought is, there isn't necessarily that sentimental value to the stock or the mutual fund, whatever it may be, to your point of the person inheriting that cost basis through the gift, that still may be advantageous from a tax standpoint. If you're in a much higher tax bracket and if you're gifting to a younger individual that really doesn't have a whole lot of taxable income, those kinds of gains taxes could be zero or it could be that 15%, maybe you're in the 15 or 20% yourself, so there is still a potential to save on some taxes depending how that all shakes out. 

Benjamin Haas  16:45
I love it. The parallel thought that was going through my head in this idea of investing with someone or using this as an opportunity to educate, get them excited about building wealth and doing the right thing. We'll sometimes get the question like, hey, can I just fund this IRA or Roth IRA for my grandchild? And I guess that the goal kind of falls in that similar camp of trying to do something nice for them. While in some ways and going back to my original comment on, you're kind of still in control because they're really not supposed to touch that money until much later in life. But you're definitely teaching them a good habit of that compounding interest. Yeah, there are caveats to that, too.

Adam Werner  17:28
Yeah, so that is true, where my mind went, I don't want to get too far off path if you had somewhere specific you wanted to go. It comes down to that timing side of the gift, right. So, if you're funding a retirement account on their behalf, that's all well and good to your point, they can, they probably can't use that today in the short term but the idea being if you're gifting to a Roth IRA for a 25-year-old grandchild, theoretically, that's going to grow for the next 35 years. Your gift today is going to be worth a heck of a lot more in the future. Assuming it's invested in, it's going to grow over that time period.

Benjamin Haas  18:12
We don't just guarantee returns,

Adam Werner  18:15
We definitely do not. For the compliance people of the world listening. The other side of that is some of that is just the mental accounting of for that individual that's receiving that gift. So, if someone gifted me $5,000, I'm using air quotes to contribute to a retirement account, then that's $5,000, potentially of my own cash flow that I may have been saving in that spot anyway, that now feels more discretionary. So it's pulling from one pocket to move it to the other, I guess, in the grand scheme of things but it just gives you that ability to be flexible when you want to. It ties purpose to the gift, I guess is what it kind of comes back to, for me the human side of what I think our clients and when we get those questions, what they're looking to do. The caveat that was in my head is you can't gift; you can't put money into an IRA for somebody that doesn't have the income. So, as great as it sounds, hey, I love Roth IRAs, money can grow tax free, potentially grow tax free. I'll just put money into a Roth IRA for them. They have to show earned income. That's the rule of contributing to an IRA.

Benjamin Haas  19:32
Yeah, good clarification. I don't know. I'm looking at a list here. I think I hit on most of the ones that we wanted to kind of focus on.

Adam Werner  19:39
Yeah, I think ultimately, when it comes to either funding or helping to fund whether that's a retirement account or just a non-retirement investment account, as you said, kind of teaching that lesson. Ultimately, it comes down to instilling values and if it's coming from the old older generation from potentially the grandparents, I think we clearly see it. And we're not that old but there's definitely changes in the way that certain generation's view, the world view investments, view all of these things. And that more emotional and personal impact I think is where a lot of people would want to see the value of their giving. So as something as simple as we're going to open this account together or I'm going to help you fund it and that passing along just the value of saving, investing all of those things, that has value that goes well beyond the pure dollars and cents.

Benjamin Haas  20:48
Well, and maybe it's a degree of protection too because keep using the counter argument being just writing a check and letting them spend it on whatever they want. Then they don't necessarily have to feel the responsibility of that like they may be tied into doing it together and it is protecting them a little bit too. You want age-appropriate gifts, you know that they're not compelled to do something at a younger age than maybe they should, that relationship goes sideways and now, you inadvertently funded an ex of some sort. They're just yeah, there are ways to keep yourself involved if the way that you want to help is both financially, but ultimately setting people up for success. What you hope will be success. I think we hit on a lot of the planning considerations. There are gifting laws, there are taxes to consider, so not to oversimplify it but I think if we can get to the priorities of what you want to do emotional or otherwise, we can back our way into any one of these ideas and make sure that the planning considerations, we understand the pros and cons to find the most efficient way to do it with you. 

Adam Werner  21:58
Yeah, and ultimately, I will share one other thing. I think we often have conversations and I know we talked about this. There's one in particular for you that, this is all assuming that the person doing the gifting is financially secure themselves and oftentimes that question is, well, how do I know that I am financially secure myself so that I can do these things while I'm living and see the impact? So, if you have any questions, yes, we can certainly help you sort through those priorities and then figure out the best way to go about it. But if you're still not even sure if this is something you could afford to do, lean on us, let's go through that exercise. Let's figure it out because if the answer is yes, then we want to help you do these things that are important to you and feel that satisfaction through the process.

Benjamin Haas  22:48
Perfect, that was a perfect way to wrap it up. You knocked the ball out of the ballpark. 

Adam Werner  22:51
Hey, homerun.

Benjamin Haas  22:54
Full circle, full cycle. All right. Thank you so much. 

Adam Werner  22:59
Good job! 

Benjamin Haas  22:59
For your time today. Appreciate all the help. 

Adam Werner  23:04
See you next time. 

Benjamin Haas  23:08
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the 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 attorneys, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.


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