Podcast: Episode 5
How can you help family members impacted by COVID-19?
Rising unemployment has resulted in financial concerns for many American families. Learn ways you can help loved ones in need.
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TIAA Perspectives Podcast Episode 5: 5 tax-smart ways to help family members in need Hosted by Jim Daniello, CFP®, wealth management director for TIAA. Joined by Colleen Carcone, wealth planning strategies director for TIAA. - [Jim] Hi everyone, I'm Jim Daniello. Wealth management director for TIAA. Thank you for joining me for another installment of TIAA's Perspectives Podcast. Where we'll talk about financial planning strategies, money management tips and steps you can take now to remain on track towards your goals. Today we'll be talking about five tax-smart ways to help family members who may have been financially impacted by the coronavirus pandemic. Since the outbreak began, the physical health of our family members and loved ones has been top-of-mind. However, a secondary concern, the financial well-being of family members has quickly emerged as a significant concern. Joining me to talk about ways to provide financial assistance to family members in need is my colleague and good friend Colleen Carcone. Colleen is a certified financial planner and a TIAA Wealth Planning Strategies Director. Great to have you with us Colleen. - [Colleen] Thanks, Jim. - [Jim] Colleen, have you seen the recent NPR poll, the one that indicated that half of all Americans have been financially affected by the coronavirus pandemic. With unemployment playing a central role. I imagine you're probably talking to a lot of clients who are concerned about whether they're going to be okay, and how they can help family members who may be struggling right now. - [Colleen] I did see that Jim. The coronavirus pandemic has created a lot of anxiety and an immediate economic need for many clients. And I have been talking to a lot of folks who have been asking if they're going to be okay. These are clients that are modest net worth or high-net-worth and all have the same concerns. The next question that they're asking is if they can help out their family members. Making sure that your own situation is secure is really important before you do try to help other family members. That's why when you're on an airplane flight attendants tell you to put on your own oxygen mask first. You don't wanna jeopardize your own financial health by helping others. The reason that we do a plan in the first place is so that we can factor in these situations. Our advisors have the skills and planning tools to perform an analysis and provide results in real time. - [Jim] You know Colleen, speaking of tools, I've been using the Life Goals Analysis financial planning tool to help clients answer this very important question. Many of our clients have gone through planning and have already had a life goals analysis. I can go into that plan, and in real time, I can update assumptions and can even enter worst case scenarios. This allows me to answer the questions, am I okay, or can I help others? It helps me answer how much a client can help loved ones while assessing the impact on their own financial future. Look, this is a put your mask on first moment. We need to make sure we really review the plan before running ahead with a gift strategy. That's what's really been important to me. - [Colleen] And Jim that helps to answer what impact helping others will have on your own needs and on your own goals. You don't wanna overextend yourself at a time when portfolio values might be impacted by ongoing volatility in the markets. Questions you have to ask yourself, Is this a one time temporary need, or will your family member require longer term support? - [Jim] And that's where scenario planning can really help. We can model different scenarios to illustrate how giving different amounts of money either one time or over a period of time, may impact goals and long-term planning. - [Colleen] And once you've determined that you are well funded we can think about which assets are the best assets to give and which strategy we'll make the most sense for your situation. - [Jim] Now Colleen as we get into the details of our five strategies here, I wanna remind our listeners that the strategies we'll be talking about today may not be applicable to your particular situation. So always consult a tax professional before taking action. Now, let's talk about the first of five smart tax efficient strategies for providing financial help to family members in times of need. And that's annual gifts. Colleen, how do annual gifts work? And what are the benefits of transferring assets in this manner? - [Colleen] Jim, gift tax rules allow each individual to give up to $15,000 per recipient. So that means I can give $15,000 to as many different people as I would like. If I was married, my spouse could also give $15,000. So together that's $30,000 to as many different people as we want. Now, there are no limits on the number of gifts that you can make in any given year, or to whom you make those gifts. And if I wanted to give more than $15,000 to a single recipient, I absolutely could do that. If I go over that $15,000 mark, I have to file a gift tax return. And the gift tax return, just lets Uncle Sam know that I have started dipping into my lifetime exemption amount. In 2020, that number is 11.58 million per person. Or again, if you're married, it's a combined $23.16 million. Now I had a client who is extremely well off, and his two sons own a restaurant together in New York City. Obviously, restaurants have been impacted. New York has been impacted significantly. And so these two sons were struggling and he wanted to help them out. He and his wife were able to give $30,000 to each son and $30,000 to each son's spouse. - [Jim] All right Colleen, so making direct cash gifts is definitely one of the easiest ways to give to family members in need. But our second strategy, which is gifting appreciated stock dovetails really nicely with this very strategy. In certain cases, gifting can be enhanced by giving appreciated stock rather than cash. The gift of appreciated stock is based on the fair market value of the stock when you transfer it. And when the person you give the stock to sells it, he or she will have to pay capital gains, which may be at a benefit if they are eligible to pay a lower tax capital gains tax rate, correct? - [Colleen] Exactly, Jim and this is something that I see often, rather than mom or dad selling the stock and potentially paying a higher capital gains tax, they can give the stock to their child. Now if mom and dad are in a higher bracket, they can pay up to 20 percent in capital gains tax, plus, they might be subject to an additional tax of 3.8 percent called the net investment income tax. That means mom and dad are paying close to 24 percent in tax. If they gave those shares to their child. If the child's in lower tax bracket then that capital gains tax rate might be lower, and the child might not be subject to that net investment income tax. - [Jim] Colleen, that can be a very effective strategy for parents or grandparents in higher tax brackets. Another thing a lot of our clients have been asking about lately, is how to help family members with tuition or medical expenses. Which brings us to our third strategy that we wanna really discuss today. Direct payments to educational institutions and medical providers. Parents and grandparents can take advantage of the exemption for direct payments to educational institutions to help children or grandchildren pay for educational expenses. I personally had worked with a client who wanted to help pay for a grandchild's college tuition. Instead of gifting the money directly through a contribution to a 529 plan. I advised that they write a check payable directly to the college. Here's why, as long as the tuition payment is paid directly to the school, it is not considered a gift under the gift tax rules and it won't count towards your $15,000 annual exclusion or require you to file gift tax return. So it was a sensible win for both a giving and a tax standpoint. - [Colleen] Absolutely, Jim. And the same is true if you wanna help pay a family members medical expenses. If you pay the hospital or doctor's office directly, it's not considered a gift. Now, this provision only applies to payments that are made directly to educational institutions, or medical providers. It doesn't apply for any other sorts of gifts. And I think the important thing that you said Jim, was that the check was made directly to the school. If you were to write a check to your grandchild, even if she endorsed it over to the university, you will have made a gift to your grandchild, that would be subject to gift tax rules. - [Jim] That last part is very important Colleen. People often don't realize that you can't just endorse a check over to an institution. It has to be paid directly to the school or medical provider. And that brings us to our fourth strategy, which is also something people may not be familiar with, but is becoming increasingly attractive in today's low interest rate environment. And that's the intrafamily loan. So how does that work Colleen? - [Jim] Sure Jim, the loan, an intrafamily loan is typically a loan between a parent or grandparent and their child or grandchild. And the way this works is, there is a minimum interest rate that must be charged. That's typically the applicable federal rate or the AFR. And that rate has to be charged in order for the loan not to be considered a gift. Now, intrafamily loans are attractive because right now, the AFR is at a historical low. And another reason these are attractive is because the loans are not subject to underwriting. They can be made based on whatever terms you ask the lender deem appropriate, as long as you're charging that minimum interest rate. And another thing is that the rate is going to be charged, the rate charge is applicable regardless of the credit worthiness of the borrower. So if your child or grandchild has a little bit of a speckled credit history, they can still get this intrafamily loan at a low rate, whereas they might be charged a higher rate if they were to go to the bank. Now, one thing to note here is that whoever is making the loan mom and dad or grandparents, have to recognize the amount of interest on loans that are greater than $100,000 as income. - [Jim] You know, Colleen, in my experience, these loans can also be very helpful in maintaining family harmony in families where adult children may be impacted very differently. It can be really problematic to make a gift to one child or a family member with an immediate need, and not to others who are more financially stable. This really helps to avoid putting a strain on family relationships because it's loan, not a gift. So it has to be paid back, right. - [Colleen] That is something we see Jim. And you're right, it is an advantage. The one thing I wanna know is that the rules governing interfamily loans are complex. The loans have to be documented. We talked about the AFR income has to be recognized. I'd like to just remind everyone to work closely with their tax and financial advisors before implementing this strategy. - [Jim] That's such a great point Colleen. We've talked about a number of ways people can give to loved ones now. But I'm talking to a lot of people who are right now starting to focus on the future. One reason is because the pandemic has shed light on how easily events outside of their control can quickly impact our health, lifestyles and financial goals. In ways we could not have imagined before. And that brings us to our fifth and final strategy that we wanna talk about today, which is legacy planning. Nearly every conversation I'm having with clients dives into legacy concerns. Clients are updating their wills and considering trusts, all with an eye towards the future. Everyone is thinking more about their own mortality and the legacy they will leave behind. - [Colleen] I'm seeing that as well Jim. And the number one thing that I keep telling clients is that they need to be sure that their estate plan is up-to-date, and that it still reflects their wishes. Typically, we tell people to review their estate plans every three or four years, or if something in their planning changes if something in their family changes. If we see a change in tax law, like we saw in December with the Secure Act. The coronavirus is something that has a lot of folks questioning what's really important to them. So we are telling clients to dust off their estate plan, review it and if it's appropriate update that plan. - [Jim] Yeah, and Colleen, I've spoken to a number of clients who are concerned about something of this magnitude happening again during their children's or their grandchildren's lifetimes. Many are looking for ways to help protect loved ones during future events, when they're no longer here to lend a hand. These clients are thinking long-term, and they're inspiring many of these discussions right now. - [Colleen] And Jim, many are engaging in conversations with their estate planning attorneys and their wealth advisors about these longer term goals. Clients are thinking about ways to preserve wealth so that they can help future generations who might face a similar crisis. And for many trust planning provides a viable solution for creating that blueprint for the future. - [Jim] I couldn't agree more Colleen. Trusts offer an enormous amount of latitude and how wealth can be transferred to subsequent generations. A big reason for that is because trust provisions can be as flexible or as restrictive as you want. - [Colleen] Jim, for example, you could establish a trust for your grandchild, where a certain percentage of the funds held in trust are reserved for higher education purposes. And the rest of the funds could be used for housing or any other potential needs that might arise over that grandchild's lifetime. The bottom-line, when you are establishing a trust, you choose the parameters and what you want that trust to accomplish. - [Jim] Well, thank you, Colleen. We really appreciate your perspectives on all of this. We've covered a lot of information today in our discussion of the five tax-smart strategies to help you provide for family members in need. To recap, these include number one, annual gifts. Two, gifting appreciated stock. Three, direct payments to educational institutions and medical providers. Four, intrafamily loans and five legacy planning. If you're looking for ways to help family members during these uncertain times, begin by working with your advisor to make sure that your own situation is secure first. Your advisor can help you to determine which strategies may help you accomplish your goals for helping family members in need. Your wealth advisor can also work together with your tax professional and estate planning attorney to help you implement these various strategies. If you have questions about any of the information we've covered today, be sure to contact your TIAA wealth advisor to schedule time to talk about your needs. Thank you for listening in. And for spending a few minutes of your time with us today. Have a great day, everyone. [END] Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is for informational or educational purposes only and does not constitute investment advice under any securities laws. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Please consult your Financial or Tax professional before taking any action. 2020 and prior years. Teachers Insurance and Annuity Association of America College Retirement Equities Fund. New York, NY 10017 1191433