Financial Focus

January 24, 2013 by Submitted

Sharing with loved ones is the theme of the season.

Giving to children and grandchildren is an important financial priority that surfaces around the holidays.

Often, we want the next and future generations to have a better and easier life than weve had, explains Deborah Lauer, vice president in Wells Fargo Advisors Key Client Solutions Group. This can take the form of bequests to heirs, but extended periods of unemployment, volatile incomes and other difficult economic circumstances among younger generations are inspiring numerous older individuals to give assets during their lifetimes, when there is a need and while the giver can see it being enjoyed.

But its also important to make sure that your generosity doesnt jeopardize your own financial security. After all, youve planned carefully for your own retirement, and financial gifts you make now can reduce the assets you have to rely on later in life.

How can you manage these competing priorities? With open communication and an awareness of tax implications, you might be able to provide the help you want to give in a way that works for the recipient and you.

Assess Your Situation

Secure your own oxygen mask first before assisting other passengers is an instruction every frequent flyer knows by heart. It also applies to your finances.

You have probably reviewed your retirement strategy since the 2008 market upheavals and are adapting to the realities of investing in a slower-growth world. Have you also reviewed your estate plans in light of these changes? And are you seeing the opportunity for assets that you had earmarked for transfer later to be given today?

Your Financial Advisor can explore how parting with certain assets now might affect your future financial independence, and discuss potential solutions for minimizing the impact of removing those assets from your nest egg now.

Its critical for individuals to prioritize their own financial security before making gifts to family members, Lauer says. Nobody wants to become a burden to their family, which can happen if you give away the assets youve acquired to support yourself.

Consider the Tax Implications

Tax rules are scheduled to change significantly next year. As a result, its important to work closely with both your Financial Advisor and tax professional to make sure any gifts you make dont trigger an unexpected tax bill.

This year, you can give individuals up to $13,000 and married couples can make gifts to individuals of up to $26,000, according to the IRS.[1]

These gifts are called annual exclusion gifts.

In addition to the annual exclusion gift, an individual may gift all or a portion of their $5.12 million gift tax exclusion without triggering a federal gift tax.

Non-cash gifts such as securities or real estate could also be given instead of cash. Medical expenses and tuition bills paid directly to the institution or service provider are tax-free, and dont count toward your annual or gift tax exclusions, the IRS says.

With the right planning, you and your team of professionals can develop a gifting strategy that is likely to achieve your desired goals without putting your finances in jeopardy.

Dont forget that your gifts dont need to be monetary. When budgets are tight, writing a check to a relative can feel like a sacrifice, so dont give until it hurts. You may discover through conversations with family that offering your time in the form of regular childcare to working parents is really whats needed, or lending your time and expertise to helping a grandchild apply for college scholarships. These dont cost money but can buy your family real peace of mind.

Keep Talking

Communication about money is critical within families. Once youve established for yourself the limits on your ability to give, share with your family members the help youd like to offer and invite them in turn to talk with you about their needs.

Maybe you already know your grandson and his fiance are saving for a first home. Find out what their shortfall is.

Also, is what youre being asked to support in line with your priorities? If you greatly value education and are committed to developing your granddaughters academic talent, you may want to offer to pay tuition directly to her school rather than giving a lump sum of cash to her parents.

If the conversation hasnt come up yet but youve perceived a need or simply want to share wealth during your lifetime, prepare for a longer discussion. It may take a few conversations with family to figure out exactly how they are comfortable being assisted, and how you can appropriately supply that assistance.

Pride can play an important role hereon both sidesas well as each partys sense of independence. Recognize that you may have differing values and consider before you start the conversation how those might influence your decision about giving.

[1] Internal Revenue Service, Publication 950.

This article was written by Wells Fargo Advisors and provided courtesy of Terry R. Campbell, Senior Vice President – Investments in Chardon at 440-286-2553.

Investments in securities and insurance products are: NOT FDIC-INSURED / NOT BANK-GUARANTEED / MAY LOSE VALUE

Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.