Simple, Low-Cost Ways to Help Family Members

The downturn in the economy and fall in asset prices puts many grandparents in a tough position. They want to help their children and grandchildren, but do not believe they can afford to help as much as in the past or as they hoped. Fortunately, you still can provide help. There are many simple, low-cost ways to help family members, and these actions are mostly tax free. These strategies allow you to preserve your wealth to ensure your standard of living and eventually leave any unspent assets to your loved ones. You also will see how your low-cost efforts help your loved ones.

Letting loved ones use your property is a great way to help. There are a number of ways to do this, depending on what you own. A vacation property or recreational vehicle 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 2009.

A strategy that costs more money is to pay for family vacations. Many families with young children cannot afford a nice trip. It is not unusual for grandparents to pay for all or part of the cost of a family vacation that doubles as a family reunion. Some grandparents pay all the costs. Others pay for the costs at the vacation destination. The younger generations have to pay only for the travel to and from the destination.

There are several benefits to the family vacation. 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. With many resorts and travel companies offering discounts in the tough economy, this is a good time to research possible vacations.

The tax consequences to this are the same as for letting someone use your property. The IRS typically has not tried to count up holiday gifts, meals, and travel when it audits estate and gift taxes. As long as your total gifts to each individual do not exceed the gift tax exclusion, there should not be a tax issue.

Another approach, if you have financial advisers, is to arrange for your financial advisers to work with your children or grandchildren. Often, you can pay the fees as part of your own plan. For example, knowing the needs and goals of your family can be integral to deciding the details of your own financial planning. Your adviser can meet with the younger generations to gather information, and will doing that the adviser can pass on advice and counseling to them.

If you have the money, you can offer to foot all or part of the bill for having your advisers work with your loved ones. The children or grandchildren would be regular clients of the adviser and receive their full benefit at no or reduced cost. The information would be confidential between the adviser and clients unless that is waived, but the advisers would know enough to ensure plans are consistent between the generations.

Often advisers 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. A very valuable benefit of this type of arrangement is family members can learn how everything fits together and what others are thinking and expecting. Using common advisers can facilitate exchanges of information that many families avoid. This can eliminate a lot of uncertainty and confusion and leave everyone better off.

Another low-cost way to help others is to let them benefit from business and investment opportunities. If you are in business or an investor, consider letting family members know of opportunities you become aware of. Perhaps you are invited to invest in local businesses or investments. You might be able to let family members know of those you think are good deals. Or you might be able to send potential business or clients to loved ones through referrals. In other words, you are using your network and contacts to benefit family members, a valuable but low-cost benefit.

Family loans are a low-cost help we discussed in past visits. You can lend at low or zero interest rates.

The key to a family loan is that you expect to need the money eventually, so you want the loan repaid. But you can do without the use of the money for some years, and younger generations can benefit from the use of that money. They can use it to earn money, buy property, or avoid borrowing 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, or perhaps you are giving 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 risk. The borrower might not be able to repay the money when you need it.

There are potential tax consequences to family loans if they do not carry market interest rates.

The basic rule is you must charge a minimum interest rate. The minimum rates are announced monthly by the IRS and are based on treasury rates. But there are exceptions, when no interest needs to be charged.

Interest is not required on a gift loan between individuals when total loans between the individuals do not exceed $10,000, and the loan is 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 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.

Failing to meet the exceptions does not result in a severe penalty. The penalty is that interest will be imputed on the transaction. Suppose you lend $20,000 to an adult child whose investment income for the year exceeds $1,000. If you do not charge the minimum required interest rate, you are treated as if you 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 under the exclusion. The imputed gift also will be free of taxes to your adult child, because gifts are not taxable. You also will treated as if you received interest from the borrower in the same amount and must include that amount in your gross income. The cost, then, is the income tax on the imputed interest amount.

If you choose to 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 tax consequences beyond those of interest payments.

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. That protects you in case the loan isn’t paid off. It also helps if the IRS tries to say you made a gift. You want to show that this clearly was intended as a loan which was to be repaid. Proper documentation and a payment schedule that was followed prove you really made a loan, not a gift.

These are a few examples of simple, low-cost ways you can help your children and grandchildren with little or no tax consequences. 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.

September 2009. RW