You don’t need a lot of wealth to develop a simple Estate Planning Strategy that helps your loved ones. You also don’t need large gifts or other transfers as part of good estate planning. Estate planning strategies aren’t only for the very wealthy, and your loved ones don’t have to wait to benefit from your estate.
Too often, presentations on estate planning focus only on strategies for those with a lot of wealth. Fortunately, there are many strategies that don’t require a lot of money and can benefit loved ones now. Your current life style won’t be diminished, and assets still are likely to be available to your heirs down the road. The strategies I outline here also ensure heirs won’t waste the wealth.
Letting loved ones use your property is a great but underused strategy. A vacation property or recreational vehicle, for example, allows them to have a family vacation at a fraction of what it would cost without your help. The money saved can be used for other family expenses. Usually the only cost to you is wear and tear on the property and some cleaning. Though use of property technically is a gift, the IRS rarely even asks about short, temporary uses of property. Even then, the value of the use should be less than the annual gift tax exclusion amount, which is $13,000 in 2012.
A further step is paying for family vacations. Many families with young children can’t afford a nice trip. It is not unusual for parents or grandparents to pay for all or part of the cost of a family vacation that doubles as a family reunion. You don’t have to pay all the costs. Develop a formula that works for you and your family.
The family vacation has several benefits. The younger generation has a good time while saving a significant amount of money. In addition, the trip can build family relationships and encourage everyone to stay in touch and get together periodically.
The tax consequences are the same as for letting someone use your property. The IRS typically has not tried to count holiday gifts, meals, and travel when it audits estate and gift taxes, though they do fit the definition of a gift. As long as your total gifts to each individual do not exceed the gift tax exclusion, there shouldn’t be a tax issue.
Another approach, if you have financial advisers, is to arrange for your financial advisers to consult with your children or grandchildren. Often, this can be included as part of your own plan and fees, because your family is integral to your own financial and estate planning. Yet, younger generations often won’t tell their parents all, and they also won’t take advice from their parents. Your adviser can meet with the younger generations to gather information and pass on advice and counseling.
You can help further by offering to foot all or part of the bill for having your advisers work with your loved ones on their own detailed estate planning strategy. The children or grandchildren would be regular clients of the advisers, receiving the full benefit of their advice and counseling at little or no cost. If the advice is good and the youngsters follow it, your gift is leveraged several times.
There are other benefits. The estate planning advisors likely will be able to coordinate plans of different members. Family members also are likely to understand how the different plans fit together. Using common advisors can facilitate exchanges of information that many families avoid and eliminate a lot of uncertainty and confusion.
Advisers generally provide some discount on fees when providing services to multiple generations of the same family. Even if you do not pay the entire fee for the services, you might be able to pay part of the cost and negotiate a discount, letting the loved ones obtain advice and counseling they would not receive on their own.
Here’s an easy, low-cost way to implement this strategy. Become one of the many readers purchase gift subscriptions to Retirement Watch for their children.
Another easy strategy is to let other family members benefit from your business and investment opportunities. Perhaps you are invited to invest in local businesses or real estate. Maybe you periodically become aware of good investments. As you become aware of them, let your children or grandchildren know about those that are appropriate for them. Or you might be able to send potential business or clients to loved ones through referrals. In other words, use your network and contacts to benefit family members.
Family loans are a low-cost way to help. These days you can lend at low or zero interest rates because of the Federal Reserve’s policies.
An advantage of a family loan is you can help when you expect to need the money eventually but won’t need it for a while. The younger generations can benefit from the use of the money by earning income, buying property, or avoiding borrowing elsewhere at higher interest rates.
For example, a family member can borrow from you to invest conservatively. The borrower keeps the investment earnings and eventually returns the principal to you. You also could write a mortgage to help loved ones buy a house in today’s discounted market. You can give them a lower interest rate on the loan than a commercial mortgage rate, or perhaps you can give them a mortgage they cannot obtain in today’s tight lending market.
The cost to you is the difference between any interest you are paid on the loan and the earnings you would have received if the money remained in your portfolio. If you really will need the money back, you want to be careful about what the loan is used for. Lending a young person money to start a business or invest in the stock market carries high risk. The borrower might not be able to repay the money when you need it. If it turns out you don’t need the money, you can make a gift by forgiving the loan.
There are potential tax consequences to family loans when below-market interest rates are charged.
The basic rule for family loans is you must charge a minimum interest rate. The minimum rates change monthly and are based on treasury rates. To find the latest rates, search the IRS web site for adjusted federal rates followed by the month and year. But there are exceptions, when no interest needs to be charged.
Interest is not required when total loans between two individuals do not exceed $10,000, and the loans are not used to purchase or carry income-producing investments. In addition, there is no imputed interest on gift loans between individuals when the total loans do not exceed $100,000 and the borrower’s net investment income does not exceed $1,000. If the borrower’s net investment income does exceed $1,000, imputed interest on the loan will not exceed the amount of the borrower’s net investment income. The $1,000 limit on investment income is determined each year of the loan, not only the year the loan is made.
When the exceptions aren’t met, interest is imputed at the federal adjusted rate. The lender is treated as if he made a gift to the child equal to the interest that should have been charged. If you haven’t already used the annual gift tax exclusion, the interest will be free of gift taxes up to the amount of the exclusion. The imputed gift also will be free of taxes to your adult child, because gifts are not taxable. You also will be treated as if you received an interest payment from the borrower in the same amount and must include that amount in your gross income. The cost, then, is the income tax to you on the imputed interest amount.
If you charge the minimum interest rate, it means your loved ones borrow from you at the same rate the federal government pays, and there are no extra tax consequences.
When making a loan to family members be sure to have all the legal paperwork in order. Treat the transaction as a real loan to an unrelated person. See IRS Publication 550 for details about below-market loans.
Now that you have seen some examples you probably can think of other ways you can help, based on what you have and what your loved ones need. The point is that you can provide meaningful benefits to loved ones without depleting your own resources.
RW May 2012.