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Gifting

Walk the Line: How to Help Future Generations Without Enabling Them

Over the years, we have worked with many clients who have different views on gifting to their children or grandchildren.  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, a thin line lies between the desire to help the next generation and the fear of enabling them.  The fact that this line is so thin may dissuade individuals from gifting at all, which shouldn’t be the case.  This isn’t exactly what Johnny Cash was talking about, but below are some ideas that may help you walk that line.

  1. Gifting with Intent
    In many cases, young adults who are just starting out their careers may not be in a financial position to live independently, cover all expenses, have some walking around money, and maximize retirement savings; yet 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 be able to maximize their retirement plan contributions, whether it be a 401(k) or IRA (pre-tax or Roth).  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 loans or a car payment, for instance.  There also seems to be a trend in which younger investors are expressing their values through their portfolios with ESG investing.  Some may take it a step further and donate to charitable organizations that support their passions and/or beliefs.  Gifting them an amount that will allow them to continue to contribute towards causes they feel strongly about could cause them to be grateful as well.
  2. 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 relatively low today, obtaining a mortgage still requires going through the underwriting process.  Intra-family loans allow parents to step in and lend their children money instead of 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.  Those rates tend to be lower than what the banks are offering on traditional mortgages and signal the minimum interest rate that a lender, in this case parents or grandparents, must charge.  For instance, the September 2021 AFR for a long-term loan is just over 1.7%.  Furthermore, the lender can use their annual exclusion amount to forgive the interest payments that the borrower owes each year.
  3. Funding Trusts
    This idea may be the most obvious.  Trusts are created and funded for a whole host of reasons, with a main one being to create a structured transfer of wealth.  We often see what are referred to as HEMS provisions built into trusts, which allow beneficiaries to gain access to trust assets to cover expenses related to health, education, maintenance, or support.  Another common feature that 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 that are funding trusts are the artists and the document itself is their canvas.  For more information on trust planning, watch our recent webinar.
  4. Education
    Getting educated about finances and taking control of your financial life from an early age is critical.  At RegentAtlantic, we make ourselves available to clients’ children because we understand how important that concept is.  Even if parents don’t want to make financial gifts to their children, we still encourage them to make an introduction to their Wealth Advisor so they can start their journey towards financial well-being.  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.  We are also happy to have meetings with the whole family to discuss broader concepts, such as the family’s mission and values, in an effort to get all members on the same page about the intent for wealth.  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.  Ultimately, it comes down to each family’s comfort level and legacy goals.  If walking the line between helping and enabling is something you’re struggling with, please reach out to your Wealth Advisor today.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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