FINANCIALLY
Speaking
Family Is Family, BUT Business Is Business
Jeffrey M. Orth is a Chartered Financial Consultant, a Certified Advisor in Senior Living, and an Investment Advisor Representative, with over 15 years of experience as a business and personal planning, insurance, and wealth management specialist. Jeff is available for group lectures and private consultations. Visit ifitfinancial. com or call 408.842.2716.
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Ioften receive calls from my older clients who are thinking about withdrawing money from their investment accounts to provide some financial assistance to adult children or grandchildren. While the intention is almost always a good one, it can have some unforeseen consequences if there is not a clear statement of expectations. Before you write that check, there are a few things you should consider to maintain harmony in the family.
Some important questions to ask are:
Is it a loan?
Loans with low interest rates generally have strict lending standards, which is why a family member might be looking to you for the loan, rather than going to an institution, like a credit union or a bank.
You and the family member can determine the interest rate on the loan, but if it is less than the IRS-required Applicable Federal Rate( AFR), the difference in dollars each year is considered a gift. The interest rate tax consequences should be discussed with your CPA for both the lender and the borrower.
At the very least, there should be signed copies of a written agreement outlining the details of the loan. Often people remember things differently and a written agreement at the onset can help prevent a misunderstanding and save a lot of hard feelings later.
Is it a gift?
If it is truly a gift, you should be aware that the IRS allows a person to give up to $ 14,000 to any other person each year with no gift tax or forms required. You can give more than this amount if it is for education or medical expenses. Any other uses of funds over the $ 14,000 limit, requires that you submit a Gift Tax Return form when filing your income taxes.
Should you be doing this in the first place?
Small gifts or loans given to your children are not likely to have a large impact on your long term financial security. But a gift of five or six figures could have a major impact on the viability on your financial future, especially if it represents a large chunk of your assets.
Even if this is set up as a loan, consider what would happen if the loan was not repaid. Would your retirement plan survive? Who will support you if you run out of money before you run out of life?
Will a little bit go a long way?
Is it possible to help a family member in need without handing over a large sum of money? If a child is struggling to meet monthly bills, perhaps you could send the difference between actual monthly expenses and and income for a pre-determined length of time, until hopefully, the child can get back on his feet and become self-supporting.
Is it going to cause any hurt feelings within the family?
Any time money changes hands within a family, there is potential for misunderstanding and hurt feelings. The situation can be made even worse when family members don’ t communicate openly and honestly. Whatever agreement you come to, get it in writing! And teach your family that you will treat them fairly, which is not the same thing as equally.
Is it OK to let my financial advisor take the blame?
There will come a time when a child wants or needs money, but you can’ t or don’ t want to offer assistance. As a Financial Advisor, I sometimes act as the“ buffer” for my client. In a case like this, you might say,“ I would love to help you out, but I checked with my financial advisor and he says that I am not in a position to do that right now.”
I have also had clients who have asked me to work with their children to help them get on track financially. In these cases, I remind all concerned that the information we share is completely confidential. This is essential if anything meaningful is going to happen.
When it comes to families and money, communication is the key. Make sure that you use your heart and your head when you make financial decisions, and remember that a financial professional can be of help in maintaining that balance.
Registered Representative of, and Securities and Investment Advisory Services offered through Hornor, Townsend & Kent, Inc.( HTK). Registered Investment Advisor. Member FINRA / SIPC, 16845 Von Karman Ave, Ste. 225 Irvine, CA 92606( 949) 754-1700. IFIT is independent of HTK. CA Lic # 0C49291
GILROY • MORGAN HILL • SAN MARTIN NOVEMBER / DECEMBER 2016 gmhtoday. com
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