| PHI L ANTHROP Y & WEALTH PL ANNING
WHEN
FAMILY
MEMBERS
COME
KNOCKING
Strategies for Responding
to Financial Requests
By Adrienne Penta
CW&W Executive Director
P
art of being a member of a family is being asked
for favors big and small. Will you dog-sit while I am
on vacation? Will you host my baby shower? Will
you put my children through college?
Clearly, requests for financial support are more substantial
and complicated than other favors. Before responding, you
should first assess whether you are able and willing to provide financial assistance. If so, then the question becomes
how to help without damaging family relationships and
incurring negative tax or estate planning consequences.
Should You Give?
When you receive a request for financial support and are
uncertain whether it is financially feasible, the best answer is
“I need to consult with my advisors.” An investment advisor
or financial planner can help determine whether a financial
commitment to a loved one is possible or prudent given
your current income, investments and expenses. They will
also be able to help you assess the potential impact giving
could have on your financial future.
Determining whether or not you are willing to help – and
to what extent – is often more difficult. As a sister, brother,
cousin or in-law, you are not a dispassionate loan officer at
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the corner savings bank. Your feelings about how hardworking your loved ones are, the life choices they have made
and how they plan to use the funds will undoubtedly color
your opinion on whether you want to make the gift or loan.
It is entirely legitimate to refuse a request for financial support if you don’t support the purpose. After all, it is your
money. You may also want to consider your decision’s impact
on family harmony. To avoid future conflict, it can be helpful
to establish ground rules about the circumstances in which
support is available. For example, you may decide that you
are willing to help all the nieces and nephews with tuition
but that you are unable to satisfy other requests for financial
help. Setting boundaries can prevent requests for help with
expenses that may seem frivolous or unnecessary and gives
your family a clear understanding of what you are willing
to support financially.
Popular Ways to Provide Support
Once you have established that you are able and willing
to help – and how much support you will provide – your
advisors can assist in designing an efficient plan. There are
a number of easy ways to provide financial help.
Outright gifts
One option is to write a check or make a direct transfer.
Under current law, you can give up to $14,000 per year
free of gift tax to an unlimited number of individuals. For
example, if you have four nieces and nephews, you may give
“
Setting boundaries can prevent requests for help with expenses
that may seem frivolous or unnecessary and gives your family a
clear understanding of what you are willing to support financially.”
$14,000 to each of them in 2016, for a total of $56,000 in
gifts. Married couples can combine their annual exclusions
and give up to $28,000 per year to an unlimited number of
beneficiaries without paying gift tax or using any of their
lifetime estate tax exemption. In the example above, the
potential gifts could total $112,000. With large extended
families, annual exclusion gifts can add up fast.
For gifts in excess of $14,000, you must either use a portion
of the $5.45 million gift tax exemption or, if exhausted, pay
the federal gift tax at the current rate of 40%. Neither are
generally efficient alternatives for wealthy individuals who
have estates substantial enough to incur estate tax.
Intrafamily loans
An intrafamily loan may be a good option when a family
member needs quick access to significant funds for an emergency or other immediate expense. You can transfer money
to an individual and take back a promissory note at a low
rate (i.e., the applicable federal rate). The exit strategy for
the loan is either repayment at a more convenient time or
forgiveness over time.
Tuition and medical expense payments
Federal tax law exempts from gift tax tuition payments (but
not books, room and board and other incidental expenses)
directly to an educational organization as well as the payment of medical expenses and medical insurance directly
to a provider.
Trusts
If these straightforward methods do not serve your purposes
or are not tax efficient due to the size and extent of your
financial assistance, the use of trusts may be a solution.
Family trust
If you want an independent third party to make decisions
about which needs and family members should take priority,
or if you simply want to put some distance between you
and the person receiving the money, a trust may be appropriate. Trusts come in many shapes and sizes – Crummey,
grantor, non-grantor, irrevocable and revocable, to name just
a few. A Brown Brothers Harriman (BBH) wealth planner can
assist you with the details of how your family trust should
be designed to best fit your and your family’s needs.
Grantor retained annuity trusts (GRATs)
and sales to grantor trusts
GRATs and sales to grantor trusts are both methods to transfer the future appreciation on certain assets to family members or to trusts for their benefit without the use of the gift
tax exemption. It is appropriate to explore these options if
you want to make gifts in excess of the annual exclusion and
have limited gift tax exemption available for this purpose.1
How to Give in a Fair and
Equitable Way
By far the most complicated issues when it comes to providing financial support relate to equality and fairness and
how to preserve healthy family relationships.
In families where one sibling or sibling-in-law has been very
successful, there is often great disparity in wealth, which can
lead to requests for help from various family members. In
this situation, challenges may arise when multiple family
members ask for support and the wealthy individual makes
distributions on a case-by-case basis. Again, even in the case
of very substantial wealth, ground rules can be helpful in
establishing boundaries.
If equality is important to you, here are a couple of useful
strategies:
• Instead of making an outright gift, consider structuring
the transaction as a loan at a low interest rate. The loan
could be repaid in the future, if circumstances change,
or it could be forgiven under your estate plan.
• If you intend to leave money to each of your siblings
or other relatives, you could “advance” that inheritance to those who have an immediate need with the
understanding that it will decrease the amount they
will receive under your estate plan.
• Create a family trust and allocate a certain amount to
the trust, and then allow an independent trustee to
assess need, fairness and timing of distributions. This is a
useful tool for avoiding uncomfortable situations, such
as having to write a check to a sibling to cover living
expenses. The trustee (for example, a bank, attorney or
accountant) can distribute funds on an annual basis,
which creates some distance between the person providing assistance and the family member receiving help.
Having the means to provide financial assistance to family
members can be both a burden and a blessing. It can strain
or damage family relationships if you are not thoughtful in
your response and consistent in your approach.
The good news is that there are many options for providing
financial support, and your BBH relationship manager or
wealth planner can help you devise a plan that meets your
goals while preserving family harmony.
More information on GRATs and sales to grantor trusts is provided in our third quarter 2015 Owner to Owner article, “Transferring Future
Appreciation on Business Interests to Beneficiaries: A Discussion of Grantor Retained Annuity Trusts and Sales to Grantor Trusts.”
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bbh.com/womenandwealth | @AdriennePenta | cw&[email protected] BBH Center for Women and Wealth
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