Simple, Low-Cost Estate Planning Strategies To Help Grandchildren

You don’t need to be the country’s remaining high technology multi-millionaire to help your grandchildren. You don’t even need to be rich. There are many simple, low-cost estate planning strategies to help, and they are tax-free. With many of these estate planning strategies, you get to see the benefits now instead of imaging how the wealth will be used after you are gone.

The use of your property is a great way to help future generations. For example, you might have a vacation property or recreational vehicle. If you let the parents (your children) use the property for family vacations, you’ll save them a significant expense they would have incurred. That savings can be used to help pay for the grandchildren’s education or other future needs. Letting others use property costs you very little, and it usually has no tax consequences.

If you don’t have property you can let the family use, family loans with little or no interest are an option. Borrowers will have use of the money, and they can use it to earn more money or buy property for themselves. The loan can be used for anything from investing conservatively for extra income to starting a business. If you don’t need the money back for many years, you could write a mortgage to help buy a house.

Your only cost of the loan is the earnings you could have received from the money. And you lose that only if it is a no-interest loan. You could charge a below-market interest rate or the prime rate. The family gets the benefit of a lower interest rate than commercial lenders charge, no credit check, and minimal costs of setting up the loan.

There are some potential tax factors, which were covered in detail in our July 2000 issue and are available on the web site. The basic rules are that you have to charge a minimum interest rate announced monthly by the IRS and that is the same as treasury rates. But there are exceptions, when no interest need 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 the individuals that do not exceed $100,000 when the borrower’s investment income does not exceed $1,000. If the borrower’s net investment income does exceed $1,000, imputed interest does not exceed the amount of the borrower’s net investment income.

Even when interest is required, your children and grandchildren essentially can borrow from you at the same rate the federal government pays on its bonds. That makes this a great time to make loans to family members, because treasury interest rates are so low.

When making a loan to family members be sure to have all the legal paperwork in order. That protects you in case the loan isn’t paid off. It also helps if the IRS does an audit and tries to say you made a gift. Proper documentation and a payment schedule that was followed prove you really made a loan.

An increasingly popular Estate Planning Strategy is to pay for family vacations. Travel can be fairly expensive, and many families with children have to stretch for or cannot afford a nice trip. A family trip paid by the grandparents can give the family an experience they never would have had or save them thousands of dollars. Also, families tend to be spread across the country these days. A family trip or reunion encourages everyone to get together at least once in a while and ensures the family doesn’t disintegrate.

If you cannot afford to pay for the entire trip, pay for a portion. Sometimes grandparents will pay for a cruise or a stay at a resort. All the children and grandchildren have to do is get to and from the location.

Technically, paying a share of someone’s vacation costs is a gift to them and counts against the annual tax-free gift amount. But the IRS in the past has looked only at gifts of money and property. It has not tried to count up holiday gifts, meals, and travel.

Another way to help your loved ones is to have your financial advisers help them. Suppose you get professional advice for your estate, financial plan, or investments. You can make sure that the needs of your children and grandchildren are considered in the plan. Then pass on to them any advice you receive.

You can go a step further and offer to pay for your advisers to work with your children or grandchildren. The loved ones would meet with the advisers, and all the information would be confidential between them. But you will have rendered a valuable benefit, and the advisers can ensure that what the children are doing is consistent with what you are doing and that the estate planning strategies are coordinated.

You should get a break on fees. Even if you don’t pay for everything, the family should get a break by using your advisers. A family buying as a group probably can negotiate a lower fee than could each family member buying separately.

Another benefit is that everyone in the family learns more and sees how things work together. That’s a big improvement over leaving loved ones assets and expecting them to know how to manage them. Often, being unprepared to handle the family’s assets can do more damage than taxes or probate costs.

If you are in business or are an investor, you can help family members by letting them benefit from opportunities that come your way. Instead of investing in a new business or project yourself, be sure that your family members know about it and get the opportunity to invest. Or when a family member is in the same business as you, consider sending some potential business or clients to him instead of keeping them for yourself.

You don’t need a fortune to help your grandchildren. A few relatively low-cost, simple estate planning strategies can provide meaningful benefits.