TRUST & ESTATE PLANNING

Smart Strategies for Giving to Friends and Non-Immediate Family

07.21.2021 - Bryan Kirk, Director of Estate and Financial Planning and Trust Counsel

Giving money to friends or non-immediate family is tricky. Even with close friends, there’s always the questions around how your generosity will mix with your existing relationship.

  • Will the gift make them feel indebted to you or start to think of you differently?
  • Will the gift offend them?
  • Will it change your relationship if they don’t use the gift the way you intend?
  • Will the gift impact other relationships, like children or other family members who may perceive themselves as your proper beneficiaries?

Imagine sitting down with a friend or cousin and telling them, “I’d really like to help make sure your kids have a financial leg-up when they start out by setting aside some money for them.” On one hand, they may welcome, if not be thrilled, by your generosity. On the other hand, your relationship will have taken on a new dimension you can’t take back once you say the words. 

Making Gifts that Are Well Intended and Well Received  

It’s important to fully think through any financial transaction involving friends or family. Business deals can ruin relationships. Gifts are no different. As you think through your situation, below are five approaches that may help your gifts be well received.   

  1. Leave a Bequest in Your Will

If you don’t want to impact your relationships, you can always wait until after you pass. Instead of making a gift during your lifetime, you can leave money or other property by means of a bequest in your will or revocable trust. Your gift may change how your beneficiary thinks of you for better or worse--but subject to your view of the afterlife, you won’t be around to tell. 

Of course, that’s also a downside to leaving a bequest. You may feel good when you write someone into your will or revocable trust, but there’s no benefit to them until you’re no longer around. You may miss the opportunity to have the impact in their life that you want to have. And it’s possible they may never get your gift if you outlive your beneficiaries.      

  1. Give Cash with No Strings Attached

Each year, you can gift anyone $15,000 with no gift or estate tax consequences. If you give over that amount, you will need to file a gift tax return and use a portion of your gift and estate tax exemption amount ($11.7 million per person in 2021). 

If you want to give to someone during your lifetime, giving cash is the easiest and most advantageous way to do it.  If you’re below the $15,000 amount, there’s nothing further for you to do. From their prospective, the logistics are potentially as simple as telling you thank you.

Then, for both of you, the trick is letting the gift stay simple. If you have expectations about how the gift will be used, you should communicate them. But be prepared to let those expectations go and consider telling them you’re fine with their decisions as well. It’s easy for strings to tie up a relationship. It’s better to make sure you’re okay with having no strings attached before you make a gift.

  1. Fund a 529 College Savings Plan Account

Funding a 529 plan account offers several benefits, especially when your beneficiary is a friend or non-immediate family member. First, helping to fund a child’s education helps both the parent and the child by relieving some of the burden of college savings.

Second, 529 Plan accounts have built-in controls around how the funds can be used. Withdrawals for non-qualified expenses are subject to income tax and a 10% penalty, so there’s a strong incentive to use the funds as intended.  Third, you can fund the account and allow the parent to be the account owner and the child as the beneficiary—taking you out of the equation but still ensuring the assets are used for educational purposes. Fourth, earnings in a 529 plan are tax-free and all the top plans have straightforward, low-cost investment options. That can take the tax and investment concerns off the table.   

Finally, when you contribute to a 529 Plan, you can give up to 5 years’ worth of annual exclusion amounts (currently $15,000 per person per year, so a total of $75,000 per person) at once without a tax consequence to you. This can have a positive impact on your relationships—allowing even a gift intended to fund someone’s entire college education to be a one-time event, rather than parsed out over multiple years creating awkward dynamics.

It’s worth noting that 529 Plan accounts can impact financial aid depending on the ownership of the account, so you’ll want discuss your plans with your beneficiary’s family to make sure the benefits don’t change their eligibility for aid.   

  1. Gift in Trust (When Appropriate)

If you feel it’s important to place some controls over the use of a gift and your focus is broader than education, you can consider making a gift in trust.

On the plus side, a trust allows you to designate exactly how money is used or made available. In addition, you can involve a corporate trustee, like Fiduciary Trust, to ensure professional handling of the funds and to create a layer of separation between you and the ongoing administration of the gift.

But on the negative side, you will introduce a form of complexity into your beneficiary’s life, which can be disorienting if not handled appropriately. While it can seem natural to guide what happens with assets you leave to children or grandchildren, with friends and non-immediate family the conditions you place on a gift can more easily become the focus rather than the gift itself.

If you decide to make a gift in trust, be clear on the benefit you intend to provide. For example, instead of saying, “I’m giving a million dollars to a trust for you subject to these conditions,” focus on your purpose and how it will be fulfilled. For example, “I really want to give you a cushion of income throughout your retirement, so what I want to do is set up a trust fund that gives you about $40,000 a year, adjusting for inflation, for the rest of your life.”  It’s the same gift, but the framing can make all the difference.

Trusts also have a critical role when your beneficiary has special needs or may be relying on government benefits. A special needs trust can set aside funds for them while not interfering with benefit eligibility.

  1. Fold in Charity

As is often the case, your options grow when you involve charity. If you want to set up an annuity for someone, you might set up a charitable remainder trust. This is a tax-favored trust where an annuity is paid during someone’s lifetime or a period of years then the balance goes to charity. The charity’s involvement may enhance the positive feeling of the gift and can make it clear you’re not looking to get something back from the gift.

If a direct gift to a friend or non-immediate family member may upset personal dynamics, consider gifting to a charity or community initiative that would be meaningful to them. You also might involve them in your own philanthropy, helping to define what is important to you and find or vet organizations that will have meaningful impact. Or if you’re focused on your estate plan, you may leave money to your donor-advised fund or private foundation and include those closest to you as the successor advisors or board members to direct the fund or foundation after you’re gone.   





 



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