Helping Your Children
The story of your financial life is really the story of your family's needs: starting a college fund for a
newborn, putting away dollars for retirement, helping parents as they get on in years. But what if you're
a member of the so-called "sandwich generation," trying to help both children and parents (and yourself!)
at the same time? You've probably already seen that your children's needs don't end when they go off
to college or are out in the "real" world. And you're not alone. Of the $203 billion passed from parents
to children in 1994, nearly half was in the form of outright gifts (31%) and tuition (17%), according to
Federal Reserve Bank studies. The rest was in the form of bequests.
So how should you help your children? Accumulating dollars is only part of the picture. There are
probably certain values and habits you'd like to pass along. You'll also want to think about tax
considerations and estate planning. And you'll want to balance your desire to help with their need to
be self-sufficient. What's more, you'll also want to think about the ways you can help yourself at the
same time, through tax and estate planning. Heritage Planning is a framework for planning that can
help you identify, prioritize, and achieve your goals for your children.
The Process Behind Helping Your Children
As with other elements of Heritage Planning, it's useful to begin the planning process by listing the
questions you already have, then extracting from that list some broader goals. You and one of our
advisers can discuss what strategies, and then which action steps, may be appropriate to help you
achieve those goals.
It Begins With Questions
What's on your mind? The questions you have can give you a better idea of what areas you'd like to
focus on in planning.
- "I'm putting aside some college money each month, but is it enough?"
- "What do I need to know about
- "My parents have been sending money to my children at college. Is this the best way to help
with their expenses?"
- "How can my daughter qualify for a car loan with no previous credit experience?"
- "I've heard about Uniform Gift to Minors Act (UGMA) accounts, but I'm not sure how they work.
Will I lose all control over the money?"
- "If I die, is there a way to ensure my children don't get too much money all at once?"
- "I watch my grandchildren three days a week. Am I eligible for any tax benefits? Are their
- "Should I offer to put my name on a mortgage for my son?"
- "Do my children know who my financial, legal, and tax advisers are, in case something happens
What are some goals you might be able to help your children achieve?
- ...a solid understanding of the potential benefits of investing
- ...and for you: maximum tax benefits in the ways you help them
- ...reduced taxes and expenses when your estate transfers to them
- ...a solid financial foundation for your grandchildren
- ...a positive credit rating
- ...not incurring excessive debt to finance college
- ...a nice home in a family-oriented neighborhood
Our financial advisers can help you (and your children, if appropriate) work out the strategies that can
bring you closer to your goals. The steps below won't all be appropriate for everyone, but they do
illustrate the range of strategies that may be available to you.
- Evaluate growth potential of investments.
- Investigate financial aid
- Find out about special college investment programs.
- Review the trust options available to you.
- Learn about your community's first-time homebuyer programs.
- Consider gifting options that offer tax advantages to the donor.
- Show children the long-term benefits of systematic savings that start early.
- Share your own financial education resources with your children.
- Combine your need for income with your children's need for capital.
- Explore ways to pass on estate or gifts directly to your children or grandchildren.
- Ensure that the timing of gifts is tax efficient.
With strategies in place, consider the actions that flow from them. The list below probably includes one
or more of the steps your adviser may wind up recommending. (individual situations vary; your adviser
can help you decide which action steps are right for you.)
- Set up an insurance trust to ensure that estate goals are accomplished.
- Establish a joint investment account with your children in which they participate in
- Invite children to meet with your own financial adviser or attend investment seminars together.
- Make a formal loan agreement with a child, rather than an outright gift.
- Invest in your state's prepaid college tuition plan, if available.
- Fund a trust with income-generating assets to reduce your own tax burden.
- For tax advantages, set up an irrevocable trust such as a UGMA account
- For control and flexibility, establish a revocable trust for funding gifts.
Helping Your Children--And Helping Yourself
Below are some hypothetical examples of how helping your children can also help you.. Ask your adviser
for guidance in deciding how these examples might work in your situation.
It's all in the timing. To reduce his tax liability, Frank Connors transferred income-producing
investment property to his daughter, Jenny, 13--a smart move at face value, but one that might have been
timed better. Had he waited until Jenny's next birthday, the income wouldn't have triggered the
"kiddie tax." Under that rule, income over a certain threshold earned by a child under age 14 is taxed at
the parent's rate.
Enlightened benevolence. Mary Stephens knew enough to take advantage of the child-care
credit on her 1040 form, but what she didn't know was that as a small-business owner, she could offer
her employees the opportunity to pay for child-care expenses with pretax earnings
(up to a certain amount)--and that she could make use of that same benefit with her own daycare expenses.
Give, give, give. After selling their family business, Joan and Jack Farrell's estate handily
exceeded the limit that triggered the federal estate tax. Seeking to reduce the estate's size, they
distributed assets to their grandchildren every year, taking care not to exceed the $10,000 annual gift-tax
exclusion. They'd like to do more--and they can, because each can make gifts of $10,000, adding up to
a $20,000 maximum exclusion. What's more, medical and educational expenses, if paid directly to the
provider, don't count against the annual gift limit. That includes orthodontia, school expenses from
elementary all the way up through graduate school, and even school-related supplies like books and
More details on these issues and many others are available.
Please understand that while this information was gathered from sources believed to be reliable, it is only
a starting point and is generic in nature. Therefore its accuracy cannot be guaranteed for every situation.
We encourage you to contact our office so that we may evaluate each situation independently and offer
accurate advice based on individual needs. We also encourage you to discuss any recommendations with
an attorney or tax advisor. If you do not have an attorney or tax advisor, we will be happy to refer you to
For more information or a list of other Heritage Planning educational materials on helping your parents, contact:
Richard M. Smith
Professional Educators Benefits Company
Post Office Box 37102
Tallahassee, Florida 32315-7102