Tuesday, December 7, 2021

Charity Begins at Home

Ask the CFP

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“Fool, ‘tis in vain from wit to wit to roamKnow, sense, like charity, begins at home. ~Alexander Pope, 18th Century English Poet 

Question: What are the best ways to financially assist family members affected economically by the coronavirus?  

Answer: You’re not alone in wanting to assist family members impacted by COVID-19. CNBC’s Millionaire Study, a recurring survey, found that 22% of millionaires provided assistance to adult children since the pandemic began, and 21% are helping other family members. In addition, 19% of millennials are providing some level of support to parents, even before the pandemic. CNBC reported that overall, about 13% of Americans provide financial assistance to a parent. 

The good news is that current tax laws surrounding gifts, along with historically lowinterest rates, make it easy to help family members in the short termand set them up for the long termonce the economic volatility settles. The following strategies may help you meet your goals.

1.Simply cash

Each of us can give someone up to $15,000 annually with no tax liability. These annual limits generally apply to single gifter-giftee pair, so if you’re married, your spouse could give an additional $15,000 and remain below the annual exclusion limit. You can also gift the recipient’s spouse, partner, child or other trusted relation, $15,000 as well. 

Any amount greater than $15,000 per recipient requires a gift form to be filed with your tax return and counts against your lifetime gift limit, currently $11,580,000 for an individualdouble that for a married couplewhich has implications when it comes to your estate. Tax laws change, of course, and this lifetime limit is set to expire by the end of 2025.  

2.Family Loan 

The IRS is rigid regarding transactions that are intended as loans but could look like a gift. This is why it’s best to have the appropriate documentation in place.  

With interest rates at such low levels, this could be an opportune time to make a loan to a family member because the rules depend on below-market loan interest rates. The current minimum interest rate, known as the Applicable Federal Rate (AFR), is historically low. In July 2020, the short-term AFR hit 0.18%, which applies to loans with a term of less than 3 years. For mid-term loanswhich will be paid back between 3 and 9 yearsthe rate was 0.45%, and for long-term loans with a repayment schedule longer than 9 years the rate was 1.17%. All of these rates are lower than what you’d expect to see from a commercial lender. 

Just make sure the loan is a bona fide creditor-debtor agreement with payment schedules, record-keeping, a promissory note and, optionally, a collateral agreement, Forbes magazine recommends. Consult with your attorney to draw up the documents and oversee the process. 

3.Transferringwith Equities 

Another way to make gifts is to transfer investments to family members. During volatile market periods, there might be times when otherwise favorable companies face the same downward pressure as all other investments. One technique is to transfer shares of stock you suspect may have a higher value in the future. An “undervalued” gift may provide the possibility of future growth. Thereby, the annual gift exclusion limit of $15,000, and lifetime limit of $11,580,000, may potentially lead to additional value in the future.  

For example, say Pete bought XYZ for $20/share a few years ago. Pre-pandemic, it was priced at $50/share but hovers around $35 now. If Pete gifts his granddaughter Averie those potentially undervalued shares, he can remove the current value from his estate and hopefully, Averie will get time to benefit from the stock’s future growth. 

Gift recipients rarely need to worry about paying gift taxes, but they may need to pay income taxes depending on the change in value of a gifted equity when they sell. The IRS also has particular rules around gifting to those ineligible tax bracketsminors or children in collegewhich could trigger the so-called kiddie tax.  

Let’s Talk 

Thoughtful and open communication may help alleviate any tension associated with delicate subject matters. Outlining expectations, and bringing in third-party advice may help reduce stress. Here are some tips:  

  • How much to give? Are you willing to delay your own retirement to help someone if these could be years when your health, wealth and time are at their peak, or are you in retirement and in a decumulation phase?  
  • Be clear. Setting terms, goals and timeline expectations upfront may prevent future disappointments. For instance, intra-family loan terms will be in writingbut have a plan if things don’t work out as expected.  
  • Bring in a professional. When it comes to decisions like these, consult your CFP Practitioner, tax professional and/or attorney to get things started. Stay focused and plan accordingly.  

This is a hypothetical example for illustration purpose only and does not represent an actual investment. Raymond James does not provide tax or legal services. The opinions expressed are those of the writer as of November 19, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. “Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.


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