Financial Planning For the Generations

Nov 15, 2016

There are multiple reasons to do your financial planning with your children and grandchildren in mind. Maximizing the transfer amount by minimizing taxes is the first reason that generally comes to mind. That’s important, but there are many other tangible and intangible reasons for including them in the financial planning process.

Your retirement plans.

If it’s unlikely you will deplete your retirement funds, it may be appropriate to convert your Traditional IRA funds to a Roth IRA. This conversion will result in you paying the income tax on funds that your children will end up spending. If your children are in a higher tax bracket, the tax-free accumulation will definitely be a benefit.

Family loans to younger generations.

Making family loans to children or grandchildren can be a win-win situation. You are required to charge a minimum interest rate based on the IRS provisions. When that rate is less than a financial institution is charging on loans, but more than you are earning on a certificate of deposit or money market savings account, it can help both you and your family member.

Investing with your heirs in mind.

To protect your own financial security, you must determine the amount of your assets that are necessary to meet your needs throughout retirement. Those assets need to be invested with safety in mind. However, the excess may be viewed as the investments your children would inherit. Therefore, the investment strategy for this portion of your portfolio can be invested with your children’s or grandchildren’s needs in mind. Generally speaking, funds that will be invested for the long-term should be invested for growth.

Sharing values through charitable giving.

If you find your portfolio is more than necessary to meet your personal needs, another strategy you might consider is establishing a charitable foundation or donor-advised fund. You will enjoy tax deductions on the money you contribute, but the real beauty of this strategy is your ability to include your children and/or grandchildren in distribution decisions. This experience is a proven way to pass along your values regarding “giving back” to your community and start them thinking in the same manner.

Annual family gifting versus complex trusts.

If your financial situation allows you to gift assets to your children or grandchildren each year, consider the needs of each of them. Being “fair” means being “equal” in the minds of some parents. If one sibling needs assistance with a down payment, what do you do for the others to equalize the situation? Sometimes outright gifts are not appropriate if another sibling is not a responsible money manager or has other issues that would make cash a detriment rather than a blessing. A trust arrangement may allow you to meet your objectives while protecting those you love.

Creating a solid financial foundation.

While you may have managed your lifestyle and your debt to avoid the big mistakes, has the next generation been as successful? It is generally never appealing to pass assets to heirs who have overwhelming credit card debt, low credit scores, and a demonstrated inability to save money. Without a solid financial foundation, any inheritance would likely only pay off existing debt, bringing him/her back to even, at best.

If this is your current situation, perhaps your dollars would be best spent by getting your heirs started with their own financial planning. Helping the next generation to understand the importance of planning and getting their financial house in order may allow them to enjoy an inheritance from you in the same responsible manner that you lived your life.

Sharing financial resources and family values with the next generation or two must be done with intention and purpose. A well-thought-out plan can benefit you now as well as establish a sense of legacy with your family members.

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