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Gifting Family Assets Creatively

hands offering a gold gift box with a gold ribbon.

If you’re looking for last-minute holiday shopping tips, you’ve come to the wrong place. I’m not a very creative shopper.

Thankfully, I am more creative than most when it comes to financial planning, and there’s no deadline for helping your family. Let’s use this giving season as a reminder that a little creativity can make your giving more effective at any time of the year.

I am no Scrooge, but before you let your generosity run away with you, remember that you should never risk your own financial wellness to support someone else. You should also bear in mind that it is important to suit the gift to the recipient. While my niece loved her new squishy toys, I would have been deeply disappointed if I unwrapped them. (If you don’t know any kids, just trust me, they’re big.) In the same way, good strategies for transferring family assets are tailored to the particular wants and needs of both the giver and the recipient. Finally, whether it’s this column or a story in The Wall Street Journal, bear in mind that quality financial advice is never one-size-fits-all, so you need to consider how these tips or other alternative ideas may or may not work in your situation.

With these caveats in mind, here are a few ideas that may inspire you to take a new gifting approach.

The gift of cash. A cash gift may not sound very creative, but you can take certain steps to enhance its impact. Some people assume that they will not pass on significant assets until they die, or at least until very late in life. But if you are in a position to give sooner rather than later, you can benefit by seeing the impact your gift has on the recipient. The gift might also allow the recipient to substantially improve his or her lifestyle.

While most people prefer a gift with no strings attached, sometimes “strings” can help. When I was a caddie in high school, my father devised a plan to match every $80 I deposited into my savings account with a $20 bonus. To this day I’m an avid saver, though regrettably my father changed this matching policy decades ago. For young adults, a parent might choose to give a child a gift so that they can contribute to a 401(k) plan or an individual retirement account. The tax benefits, and potentially an employer match, such contributions would generate help make the gift go further. Starting to save for retirement at an early age also has compound benefits later in life. Likewise, you can consider structuring a trust with incentives to encourage or discourage certain behavior.

Another strategy is to make your annual gift to a 529 education savings account. A 529 offers tax-free investment growth and allows you to front-load up to five years of giving if you wish. When giving any gift, it’s important to remember that the Internal Revenue Service imposes gift tax reporting requirements if you give more than $15,000 to any one individual per year; a 529 offers a way to give more at once. Under the 2017 tax reform law, you may now also use funds in a 529 account to pay for K-12 tuition expenses up to $10,000 per year, further expanding the assets’ potential use. If you’re going to support someone’s education financially, contributing to a 529 plan can make the most of your gift.

The gift of appreciated assets. If you plan to make a gift during your lifetime, consider whether you could gain an advantage by transferring appreciated securities rather than cash. If the recipient would be subject to a lower capital gains tax rate, transferring appreciated assets to them before selling those assets can keep a greater portion of that asset’s value in the family. Depending on the recipients’ circumstances, some people may be subject to no federal capital gains tax at all, though you should be aware of the recently adjusted kiddie tax rules when determining whether this applies to your situation.

Of course, giving appreciated assets during your lifetime can also be a bad decision if you would otherwise hold them until your death, which would provide your heirs with a step-up in basis. And to add one more complication, sometimes transferring assets to someone who is expected to die in the near term can yield tremendous benefits, but such a gift is also subject to pitfalls. This may be a strategy best deployed with the help of your financial adviser.

The gift of a helping hand. Sometimes a loved one may not need anything more than a simple boost, or you may not be in a position to give more than that. Either way, an intrafamily loan can foster independence and responsibility in a relative who is hoping to make a large financial step forward, such as purchasing a first home or establishing a new business. If it is structured correctly, a loan may also help your recipient pursue his or her educational goals without losing access to need-based financial aid.

If you intend your assistance to be a true loan, rather than a gift, it is important to set up the rules in advance. You should determine an interest rate, which cannot be below the Applicable Federal Rate. The IRS sets this rate – or rather, rates, depending on the length of the loan – each month. If your interest rate is below the Applicable Federal Rate, the IRS may treat the forgone interest as a gift for tax purposes. You should also determine a repayment schedule and the penalty for any “defaults.”

Intrafamily loans can offer mutual benefits to the lender and the borrower. The borrower can get a better rate than at a bank, and the lender can earn a return while helping a loved one pursue his or her goals.

The gift of advice. Depending on your expertise and your relationship to the recipient, he or she may greatly appreciate the gift of some wisdom. Often emotions and family dynamics will get in the ways of providing advice yourself, however, so arranging for a professional to take care of something the person does not have the time, energy or expertise to handle can be an incredibly thoughtful gift.

Consider whether your recipient might benefit from the services of a college admissions coach, a career coach, a personal trainer, a health coach or even a financial planner (yes, this is a shameless plug). For example, consider offering to pay for a consultation or ongoing services from a Certified Financial Planner™. Young adults may not think they are yet in a position to need such advice, but in truth, young professionals can benefit hugely from sound professional feedback at this stage of their financial lives. The financial planner may be able to identify ways the recipient could take better advantage of his or her benefits, and encourage the family to work together to optimize their wealth. Having one planner working with both parties can help improve planning outcomes, though both clients need to agree in advance on the terms of what information, if any, the financial adviser may share. And adding an independent third party to financial discussions can help both family members feel more comfortable with sometimes-awkward topics.

While everyone’s situation will look slightly different, I hope these ideas will encourage you to think creatively about how you can better help your family all year long. After the traditional presents are unwrapped, consider talking to your adviser about other creative approaches that might work well for you.

Client Service Manager Benjamin C. Sullivan, who is based in our Austin, Texas office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 13, “Federal Income Tax,” and Chapter 16, “Investment Psychology.”

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