Money Conversations with Adult Children

By Robert Dowling, CFP®

Wealth Manager, Principal

July 31, 2020

The money conversations you may have had with your children when they were growing up are certainly different once they become young adults. At some point the realities of your wealth become more tangible for them and it becomes crucial how you approach these discussions. This can affect your strategy for wealth management and how you might transfer that wealth to future generations.

One place to start is to ask yourself: Are your children financially responsible and trustworthy enough for you to share information about your own personal wealth? Or would you prefer to keep your own financial affairs separate and private? There is no one right answer for every situation, and often it’s a matter of degree rather than all or nothing.

Considerations for a Common Yet Complex Issue

While the decisions to involve your adult children in your money decisions can be complex, they are increasingly common, especially if you have successfully grown your wealth over the years. For example, according to a Pew Research 2015 study, about 61% of parents in the United States with adult children have financially helped their adult child over the preceding 12 months, and that percentage goes up to 73% for higher-income U.S. households.1

There are many opportunities to introduce financial discussions with family members.  However, we will focus on five common areas and some possible ideas and considerations when it comes to money conversations with your adult children around them.

Lifetime Gifting: When it comes to intergenerational planning, you have two basic choices: You can either leave wealth in your estate to pass to future generations, or you can gift your wealth while you are still alive. If you are in the latter camp, you can gift directly up to $15,000 per year, per person (2020 gift tax exclusion limit). Alternatively, you can include the child in the discussion about gifting low basis stock or other liquid assets to a brokerage account to your children, which they could in turn sell for cash at an assumed lower capital gains tax rate than you would pay if you sold the asset in order to make the same cash gift. This will involve the child in a gifting, tax and investments discussion.

Favorite Charitable Causes: Do you have children with a cause that is particularly important to them? If so, you may decide to make gifts directly to a child’s favorite charity to support that charity or you can discuss an alternative strategy with a Donor Advisor Fund. Donor-advised funds (DAFs) are a great way to make irrevocable gifts of personal assets. DAFs create a multi-year charitable giving plan while allowing you to receive a full and immediate charitable tax deduction up-front. The latter approach would allow both parent and child to sit at the table to review the investments in the DAF, reducing taxes paid and discuss which charities to support. This can be especially meaningful if you have created a family mission statement and have agreed as a group on various causes or issues you’d like to support, and then gift accordingly using a DAF.

Business Investment with Intrafamily Loans: Perhaps you have children with a passion that might include starting their own businesses. In this case, you could also provide seed capital or a business loan to help them get off the ground. A loan to your child can be a relatively simple and sometimes underutilized way to transfer wealth, especially for annual transfers in excess of the 2020 gift tax limit of $15,000. In addition to a potentially lower interest rate versus a bank loan, an intrafamily loan also offers a potential return-on-investment benefit. For example, loan the money to someone in a lower tax bracket who can use the proceeds to earn a rate of return on an investment that is higher than the interest rate you charge on the loan. In this way, you can effectively transfer wealth in the form of this excess return without paying gift tax. Even though it is a family member, remember to create a formal promissory note for the loan and track payments so that the IRS views it for tax purposes as a loan and not as a gift.

Your Children and Wealth Manager: It can be a good idea to introduce your adult children to your wealth manager and get them involved in conversations. Even if you do not want to fully disclose your wealth to your kids, it is usually prudent to provide them with an educated resource to turn to if something happens to you. Depending on the child, you may wish to start the conversation and education process by first sharing literature or online webinars before arranging for an in-person meeting.

Health and Wellness: What are your plans with regards to your health and wellness in the future?  It is worth having this conversation with your adult children.  This can include your lodging preferences as you age as well as care wishes. They may have questions about financial support and it’s important for them to understand what you would like in the future.

There is no one-size-fits-all strategy when it comes to money conversations with your adult children. There can be many variables that can come into play, including the number of children, their own special needs or medical conditions, or their overall ability and interest in discussing and managing money matters. At Modera Wealth Management LLC, we will work with you and your adult children to develop a customized strategy that makes the most sense for your individual situation.

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