The market declined slightly last week, with the Consumer Price Expenditures, or CPE, report, coming in as expected. The CPE is the Federal Reserve Bank’s preferred inflation measurement. This week, we’re facing a looming government shutdown. That may delay the release of Friday’s jobs report, as well as reports on job openings and manufacturing activity. Consumer confidence data is also scheduled to be reported this week. All of this information will help the Fed determine if another rate cut is in order next month.
Another piece of data recently released comes from a study by Ameriprise, showing that three-quarters of affluent parents are assisting their grown children financially. This may take the form of one-time help, such as a gift towards a down payment on a home. But almost two-thirds are covering ongoing bills like cell phones and other living expenses. And 36% of parents are worried that supporting their adult children will hurt their retirement.
Working with a financial planner can be a great way to decide how much you can afford to spend supporting your children. For some retirees, this support is a sacrifice, curtailing travel, entertainment, and other discretionary spending. And it crosses the line for some, meaning that their resources will be fully depleted, leaving them relying on Social Security as their only means of support.
For other retirees, this becomes a conversation about generational wealth. If you have the resources, it may be better to assist your children while they are working and raising a family, giving them a head start, rather than leaving them a large sum of money when you pass away. You can see the impact your gifts make.
Many retirees help with grandchildren’s tuition. Tuition paid directly to a school is not considered a gift and does not need to be reported. Or, grandparents can fund a 529 account for future education. Without filing a gift tax return, a grandparent can contribute five times the annual gift tax exclusion amount, currently $19,000, to a 529. No additional gifts can be made for the next five years. If you and your grandchild are both in Maryland, you may also qualify for matching funds from the state.
Helping a child with graduate school also does not trigger a tax issue if tuition payments are made directly to the school. Similarly, payments made directly to a provider for medical care do not count towards the annual gift limit.
Some parents want to provide cash support. Each individual is allowed to give $19,000 a year to any other individual without filing a gift tax return. A married couple could give their adult child $38,000 annually. If you are giving a larger sum for a down payment or other large expense, there are still no taxes due on either side. Your tax professional needs to file a gift tax return, but you have a lifetime limit on gifts and inheritance of $13.99 million right now – and that increases to $15 million next year.
The one recommendation we make around cash gifts is that your child be required to meet with a financial planner, preferably one who holds the CERTIFIED FINANCIAL PLANNER™ certification. Cash gifts can help adult children secure necessary insurance to protect their family, fund college savings for their children, shore up retirement savings, pay down debt, and build emergency savings. Working with a professional can provide peace of mind that your gifts are being used wisely.
Your action item this week is to set your holiday budget. Get a head start on travel plans, and outline your gift list.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.