Play fair with family and money


Most clients want to help their children and grandchildren financially and to keep that help as fair as possible. The devil is in the details, as the offspring seldom follow the same path in life, let alone at the same time. Some may need more, some may need less, and these requirements may change over the years.

Here are some ways parents and grandparents can efficiently provide money and support to their children and grandchildren without compromising customers’ financial security or family harmony.

Same amounts

The key factor in avoiding bankruptcy and infighting is the philosophy that when providing financial assistance to a sibling or grandchild, they should strive to provide a similar amount to other family members at the same time. Doing this at the same time ensures that each sibling is paid an equal percentage of the client’s net worth.

For example, let’s say your customer calls you and says that their adult daughter needs $ 20,000 to buy a decent used vehicle. Provided the customer is so inclined, he should also consider giving his other adult children the same amount, whether or not they are buying a car at the time. If the customer cannot afford (or can bear) giving the same amount to all adult children at the same time, they should reduce the size of each gift until they reach a more tolerable total. And he might appreciate being able to blame his discounted financial advisor for the discounted gift.

higher education

One of the fairest ways to raise money for college is to deposit equal dollars in a 529 account for each child or grandchild. The dollar amounts should be the same regardless of the age difference of the children, as future investment returns are likely to be offset by college cost inflation.

A question among the children (or their parents) might be, “What if a particular child is out of college and / or needs the money to spend on higher education?”

The client has several options including indicating that the size is only for those who continue their education beyond high school, liquidate the account and pass the net proceeds after tax (and fine) to the designated beneficiary or account balance another family transfer member who needs the money for college.

Some of the client’s descendants may at some point wish to earn advanced (and expensive) degrees such as law or medicine. Unless the client is willing and able to pay the same amount to the rest of the family members of the same generation at the time, she should encourage students to take out loans from public or private lenders to cover their educational costs. Since the student will (hopefully) be responsible for repaying these loans from her future income, this rejection will force her to reevaluate the economics of spending more time and money on additional years of school.

Home ownership

Because home prices can vary widely by geographic area, your customers may face a dilemma when trying to help their adult children buy a home. The offer to give prospective buyers a percentage of the home’s purchase price (say 10%) may seem fair, but it makes a big difference in dollars for one child to buy a Manhattan condo and another a standalone apartment buys home in Peoria, Illinois. The use of percentages could also give the children an unintended incentive to buy a more expensive place as it increases the size of the gift.

Instead, the older generation could indicate that they will provide the lesser percentage or a flat dollar amount. For example, either the 10% above or $ 25,000, whichever is lower.

Illiquid assets

Often times, a client’s wealth consists not only of paper investments like mutual funds and CDs, but also of owning a small business or property. Dividing these illiquid assets evenly is difficult enough, but even more so when certain family members have a greater interest than others in owning and operating the asset.

The simplest, but most capital-intensive solution is for the older generation to have the wealth assessed by an independent expert, give it to family members who want it, and then give it to the children or grandchildren who do not have other investments of equal value, the illiquid wish Owning asset.

These transactions can also be structured as an ongoing or annual series of distributions, particularly if the illiquid asset can be broken down into fractional shares that can be given each year.

Another option is for the family members involved to buy the asset now from the older generation, with the purchase being funded either by a bank or by the sellers. Then the buyers ‘loan payments are thrown back into the original owners’ portfolio (and ultimately into the property) to be evenly distributed among the descendants, including the buyers.

Family heirlooms

Speaking of conflict avoidance, naive customers may be shocked at how family disputes can arise when given seemingly worthless items like an old lamp or dining table. Rather than getting the heirs to participate in a royal battle after death, it is best for the older generation to take a proactive approach to leaving sentimental possessions.

The cleanest, coldest practice is putting everything in a client’s estate up for public auction and forcing family members to raise their own money to beat the highest bidder for a particular item. A softer strategy, however, would be to have customers make an inventory of items and then give each interested family member the same number of fictitious “points” that the child or grandchild can use to bid in a private auction open only to relatives. There may still be conflict, but removing real money from the equation will level the playing field.

Kevin McKinley is the principal / owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make your kid a millionaire (Simon & Schuster).


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