Blue Haven

The impact of cross generational gifting and inheritance

There’s a common theme we’ve noticed amongst our older clients who have adult children: they want to help out financially. The Baby Boomer cohort is the wealthiest generation in America and they don’t seem very interested in keeping all of their assets for themselves. Instead, they’re making cash gifts to children and grand children, helping with down payments, covering tuition costs, and funding retirement accounts. Whether you’re on the giving or receiving end of this help, it’s important to factor these benefits into your own financial planning.

How much do I need to save for retirement?

Let’s face it, some people are luckier than others. A 40 year-old who is going to inherit $5 million when their parents pass away doesn’t need to save as much for retirement as a 40 year-old who isn’t going to inherit anything. Heck, they may not need to save anything at all. The financial planning ramifications of such an inheritance are huge.

Let’s extrapolate out the hypothetical of a 40 year-old who does not need to put away $2o,000 per year in a 401(K) for retirement purposes. That’s $20,000 that can be redirected to pay down debt, save for college, or spent on a child’s development (tutoring, sports, etc).

But how does this person know that they will fall into this super fortunate category? They have to try and find out.

Tips for finding out if you’re one of the lucky ones

In our experience, many Baby Boomer parents who are gifting do not disclose such plans ahead of time. They tend to make spontaneous or reactive gifts. For example, a cash gift to each child or grand child around the holidays. Or, they offer to assist with a down payment after an adult child talks about desires to buy a home.

To improve financial planning experiences, we encourage gift-givers to speak openly to gift receivers about their plans. Are you planning to cover 25% of your grand daughter’s college expenses? Tell your adult child that… they may be scraping together 529 deposits every month and are anxious about under-funded accounts. Planning to help your child with a down payment? Tell them that… they might be punting on a home purchase right now because of high mortgage rates or lack of cash for a down payment.

How do you bring prompts like this up? The financial dinner date is becoming a popular way to discuss finances with a loved one.

On the receiving side… how can you respectfully and sincerely inquire if your parents plan to help you out financially?

One tip: go to their financial advisor.

Reaching out to your parent’s financial advisor

You can reach out to your parents advisor (who may also happen to be your advisor) and say that, in the midst of your own financial planning, you realize that you don’t know what your parents plans for their estate are. Do they plan to leave an inheritance? Give it all away to philanthropic efforts? Are they spending their retirement so that there’s none left when they pass away?

You can ask these questions in a rhetorical fashion so that you are not actually prodding for information the advisor may not be comfortable sharing. Rather, your goal is to invoke a train of thought on the advisor’s side where they suggest to their clients (your parents), “Hey, you know it might be time we bring your kids up to speed on your estate plans.” Or, “You know your son is really worried he doesn’t have enough saved up for his daughter’s college… you guys have talked about helping out with tuition, but have you told him that recently?”

Don’t feel weird about reaching out to your parent’s advisor on this topic. The advisor would LOVE the chance to speak with you. After all, who do you think the advisor wants to work with as estate planning comes into focus? The person(s) who is inheriting or overseeing the estate. So we promise the advisor will be very interested in the chance to establish a relationship with you.

Other conversation starters

Not everyone has a financial advisor though and some children really struggle with how to talk to their parents about money. Well, here’s one suggestion: send them this article. Nothing breaks the ice like a, “thought you might be interested in this article” email.

Here are some other tips:

  • Use examples that make it about them, not you…
    • “Hey, my friends parents just ran into a situation where the father died and the mother wasn’t prepared to handle the finances. Is this something you and dad have talked about? Do you have an estate plan in place?”
  • Cite tax laws as a conversation starter…
  • Be gracious in accepting gifts and share what you plan to do with the funds, but also try to learn more information…
    • “Thank you SO MUCH for the unexpected gift this year. I am going to use the funds to make an IRA contribution for my wife since she doesn’t have a retirement plan through work. Was this a one-off gift or something you plan to do in the future as well? It’s so helpful to know that I can start funding her retirement more easily.”

As cross-generational gifting becomes more commonplace, its important to become more transparent in your gift giving. It’s up to gift givers and receivers to communicate together so that everyone involved can plan accordingly.

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