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Not Your Usual Graduation Gift

At colleges across the country, new graduates will be marching across stages to receive diplomas.  There’s one more lesson that will be invaluable as they enter the working world: financial security.  Parents and grandparents can help by underscoring the importance of:

Saving for retirement — The rocking chair and gold watch may be decades in the future, but the earlier a regular savings program is started, the more time the funds have to grow.  Even if an employer offers a 401(k), most graduates will also be able to contribute to an IRA.  Up to $5,500 can be put into either a traditional or Roth IRA.  Annual contributions of $5,500 over 40 years will grow to nearly $959,000, assuming a 6% interest rate.

Avoiding debt — Many graduates face significant debt before ever collecting their first paycheck, thanks to student loans and the use of credit cards in college.  Paying off any loans as quickly as possible enables the graduate to better save for long-term goals such as the purchase of a home.

Being insured — Many graduates will be facing the fact that they are no longer on their parents’ health insurance policies.  If coverage is not offered through an employer, individual policies are available.  Car, homeowners or rental insurance and life insurance are also important.

Philanthropy — Many older Americans know the joy of giving to charity.  While recent graduates might not have the funds to make substantial gifts, parents and grandparents can encourage the younger generation to give of their time and to consider ways to include gifts to charity in their budgets.

Anticipate – and Hopefully Avoid – Estate Disputes

Having an up-to-date estate plan goes a long way towards resolving family squabbles — but there may be disputes nonetheless.  What are some steps to discuss with your attorney in drafting a plan that anticipates some of these problems?

  • Think carefully about the use of language regarding family members.  When you use the term “grandchildren,” do you want it to include adopted children, only children alive at your death or step-children?

  • Many assets pass outside a will or living trust — life insurance, jointly held property and retirement plans with named death beneficiaries.  Coordinate these assets with the rest of your estate.

  • There is no upper age limit for executing a will, but if there is a competence question, the probate court will look to whether the individual had the mental capacity to know what objects were in the estate and to recognize the family members who would normally inherit (called testamentary capacity).  If you plan to leave your estate in disproportionate amounts, or even to disinherit a family member, it might be wise to explain your reasoning.

  • Determine how any debts, administrative expenses and taxes are to be paid.  Some assets, such as life insurance and retirement plan benefits, may pass outside the will.  If these non-probate assets pass to one child, for example, while another child receives assets from the estate, taxes and expenses may be shared disproportionately.

  • Consider making lifetime transfers, rather than leaving assets in a will or trust.  You will know the assets will pass as you want, but ask your advisers about any gift tax consequences.

  • If you’re concerned about family members squandering an inheritance, ask your adviser about trusts, or consider options that provide lifetime payments to a loved one, with assets eventually passing to charity.

Good Estate Planning for Poor Health

As soon as spouses begin accumulating assets, they should each have a will drafted.  The serious illness of either spouse is an indication that it’s time to revisit those plans.  What are some steps to consider?

Review asset ownership — In most states, assets held in joint tenancy pass automatically to the survivor and get a stepped-up basis in only one half.  Shifting ownership may enable a basis increase in the full value, thereby saving capital gains tax in the future.

Get documents in order — Make sure both spouses’ wills are up to date and that any trusts reflect the couple’s current wishes to take advantage of tax-saving opportunities.  If the ill spouse has a qualified retirement plan, review the beneficiary designations and expected tax results.  Prior spousal consent is required if anyone other than the surviving spouse is named a beneficiary (other than for IRAs).

Capital gains and losses — Ask a tax adviser to suggest strategies for investments that are owned jointly or in the name of the spouse in poor health.  Consider selling loss assets, to preserve capital loss deductions, or make a lifetime gift of the loss assets to the spouse likely to survive.

Plan your charitable gifts — Many people who make charitable gifts during their lifetimes want to remember favorite organizations in a will.  With few people subject to the estate tax (only estates in excess of $5.49 million in 2017), a better option might be to allow the surviving spouse to make a memorial gift, which will qualify for an income tax charitable deduction.

Helping Mom and Dad – without Intruding

Some elderly parents are more than happy to let their children take over the job of paying bills, reconciling the checkbook and making deposits, especially if the parent is a widow or widower who never handled the financial responsibilities of the marriage.  Other parents may fiercely guard their independence and want to stay involved in their finances.  There are steps that children can take to be ready to step in when a parent is no longer able to handle the tasks:

  • Arrange for certain bills to be sent to the child in the event the parent fails to pay on time.  For example, utilities, insurance companies and credit card issuers can be given the child’s name and e-mail address, with instructions that the child is to be notified if a bill has not been paid within a specified time after the due date.

  • Add the child as a signator on financial accounts.  The parent can remain the sole owner of the accounts, but the child can direct that payments be made if the parent becomes unable to act.  Ask financial institutions to forward monthly statements to the child, who can monitor them for any unusual activity.

  • Sign up for direct deposit of Social Security payments, pension checks and other sources of income.  This prevents the misplacement of checks through the mail and avoids a trip to the bank.

These measures can be especially important if the child does not live close to the parent, and may serve as a signal when it’s time for the child to provide more assistance or obtain more help for the parent.