It’s a wonderful thing to have enough wealth where you have the flexibility to share it with others. Many of our clients find themselves in the enviable position of being able to share their wealth with those closest to them, whether it's gifting money to children, parents, extended family, or friends.
But sharing wealth does come with some risk. We encourage our clients to think about the larger implications when considering making gifts or sharing their wealth with others.
Here's a list of some of the key considerations to make before gifting to family members:
1.) How will it impact your financial future?
Making sure your own finances are in order is the first step in determining whether you can (or should) be gifting substantial sums of money. Are you sure you have enough to make a gift without hurting your financial plan down the road? Have you considered what may happen in the event of a catastrophic situation, such as a major medical diagnosis, premature death, or other? Work with your financial planner to determine that you have adequate assets and income sources to make gifts and support your lifestyle throughout retirement.
2.) Are you setting reasonable cash flow expectations?
Will your family members see these gifts as one-off or recurring? What happens if the gifts come to an end after they've started to rely upon them for daily needs? You could be unintentionally setting unrealistic expectations about your loved one’s ability to maintain a particular lifestyle if this gifting were to cease.
3.) Will your gifts reduce their eligibility for Federal or State aid?
If you are gifting to individuals who receive Federal and/or State benefits, you could be negatively impacting their eligibility. Put another way, the gift you make may actually end up being paid back to the Federal, State or Local agency responsible for paying ongoing benefits.
4.) Will your gifts impact their Financial Aid eligibility?
Gifting money or financial assets to a student may result in a reduction in how much tuition aid they're eligible for. If you're gifting to help pay for college expenses, consider paying their educational institution directly; payments made directly to a college or university do not constitute “gifts,” so you're not required to file a gift tax return for them.
5.) Could your gift encourage excessive spending?
Consider the possibility that gifting may lead to the recipient developing excessive spending habits and/or living beyond their means. As advisors, we encourage our clients to create and live within a budget. We all have wish list items, but is it reasonable to think we should always have what we wish for? Generally speaking, we find the answer is no. We don’t encourage individuals and families to live beyond their means as history suggests this is generally an unsustainable model.
6.) Could your gift reduce their work ethic?
While you probably intend your gift to be a symbol of appreciation or support to help someone you care for, it can also have an adverse effect on their motivation. The added freedom could create a sense of security that could reduce their work ethic, passion, and drive, which hurts their financial stability in the long term.
It helps to be working with a CERTIFIED FINANCIAL PLANNER™ Professional to know whether or not your gifting decisions are aligned with your overall financial plan. There's no one-size-fits-all approach to doing the right thing, and you should give careful analysis to the gifting methods available and the unintended pitfalls or consequences that may result.