Wealth Planning CI RegentAtlantic Private Wealth

Walk the line: How to help future generations without enabling them

Over the years, we have worked with many clients with different views on gifting. For some, making life worry-free for future generations is a top priority. Others believe that struggle is a necessary ingredient in the recipe for success. Most, however, fall somewhere in the middle. For those people, there is a thin line between the desire to help the next generation and the fear of enabling them—which sometimes keeps families from gifting at all. So, with apologies to Johnny Cash, below are some ideas that may help you walk that line.

Gifting with Intent

In many cases, young adults just starting out t may not be in a financial position to live independently, cover all expenses, have some walking around money, and maximize retirement savings even though they are constantly told how critical saving is at an early age. One idea is to supplement your child/grandchild’s income on a monthly basis so that they have enough to maximize their retirement plan contributions. This allows them to see the impact of saving early and benefit from this disciplined approach. 

Another approach could be to gift enough to help them cover one or two major expenses each month—student loan or car payments, for example. There also seems to be a trend in which younger investors are expressing their values through donating to charitable organizations that support their passions. Gifting them an amount that enables them to continue doing this can be a great idea as well.

Intra-Family Loans

Intra-family loans can be a great way to help family members fund a large purchase, such as a home. Although traditional mortgages rates are still relatively low, obtaining a mortgage requires going through a rigorous underwriting process. Intra-family loans allow you to step in and lend your children money, rather than having them turn to the bank. 

The greater benefit is that the rates on intra-family loans are based on the Applicable Federal Rate (AFR), which is published by the IRS each month. These rates tend to be lower than what banks are offering on traditional mortgages and signal the minimum interest rate that a lender, in this case parents or grandparents, must charge (ranging from 2.84-3.35% as of August 2022). Furthermore, the lender can use their annual gift exclusion amount to forgive the interest payments that the borrower owes each year, providing a tax benefit.

Trusts

Trusts are created and funded for a whole host of reasons—often to create a structured transfer of wealth. We often see provisions built into trusts that allow beneficiaries to access trust assets to cover expenses related to Health, Education, Maintenance, or Support (commonly known as HEMS). Another common feature we see is age-based distributions. For example, a beneficiary can be slated to receive 25% of trust assets at age 30, 25% at age 35 and the remainder at age 40. The beauty of trusts is the flexibility that comes with creating them. Those funding trusts are the artists and the document itself is their canvas.

Education

Getting educated about finances and taking control of your financial life from an early age is critical. Even if parents don’t want to make financial gifts to their children, we still encourage the parents to make an introduction to their Wealth Advisor. One-on-one meetings between the next generation of advisors and potential clients provide a safe space for them to ask questions and get a personalized experience, while sharing details about their situation. It is also wise to have meetings with the whole family to discuss broader concepts, such as the family’s mission and values. Opening this line of communication could result in a smoother transition of wealth over time and could potentially keep those values intact for generations.

These are just a few ways to consider helping future generations. For more information, please reach out to your CI Private Wealth Advisor today.


ABOUT THE AUTHOR

Michael Pappachristou, CFP

Michael Pappachristou, CFP

Wealth Advisor

Mike is responsible for building client relationships, analyzing their financial pictures, and providing recommendations to help them achieve their financial and legacy planning goals. He joined RegentAtlantic in 2016 and has been an active member of the Firm’s Financial Planning Committee, providing thought leadership across a range of financial planning topics. Mike is a host of The Family Bonds podcast, where he and two colleagues – through personal stories and professional interviews – explore the impacts that financial decisions can have on family dynamics. He appreciates working with families across multiple generations and keeping their goals and values in mind at all times.




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