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Playing Fair with Family and Money

Conflicts may not be avoidable, but they can be reduced.

Most clients wish to help their children and grandchildren financially and to keep that assistance as equitable as possible. The devil is in the details, as the offspring rarely take the same course in life, much less at the same time. Some may need more, others less, and those needs can change over the years.

Here are some ways parents and grandparents can efficiently provide money and support to their kids and grandkids, without jeopardizing the clients’ financial security or family harmony.

Equal Amounts

The key factor in helping the clients avoid insolvency and infighting is to adopt the philosophy of whenever they are providing financial support to one sibling or grandchild, they should strive to give a similar amount to other family members at the same time. Doing so simultaneously ensures that the same percentage of the client’s net worth is being doled out to each of the siblings.

For instance, let’s say your client calls you up and says that his adult daughter needs $20,000 to purchase a decent used vehicle. Assuming the client is so inclined, he should also consider giving an equal amount to his other adult children, whether they’re buying a car at that time or not. If the client can’t afford (or stand) to give the same amount out to all of his adult children concurrently, he should scale back the size of each gift until he reaches a more tolerable total figure.   And he might appreciate being able to blame the reduced gift on his “bad cop” financial advisor.

Higher Education

One of the fairest ways to provide money for college is to deposit equal dollar amounts for every child or grandchild in a 529 account. The dollar amounts should be the same regardless of the difference in the children’s ages, as the future investment returns will likely be offset by inflation in college costs.

A question among the children (or their parents) might be, “What if a particular child doesn’t attend college, and/or need the money for higher education expenses?”

The client has several options, including specifying that the largesse is only for those who further their education beyond high school, liquidating the account and giving the after-tax (and penalty) net proceeds to the designated beneficiary or transferring the account balances to another family member who needs the money for college.

Some of the client’s offspring may want to eventually pursue advanced (and expensive) degrees, such as law or medical school. Unless the client is willing and able to dole out an equal amount to the rest of the family members of the same generation at that time, she should encourage the student borrow from public or private lenders for whatever else she needs to cover her educational costs. Since the student will (hopefully) be responsible for repaying those loans from her future income, this rejection will force her to re-evaluate the economic viability of spending more time and money on extra years of schooling.         

Home Ownership       

Since housing prices can vary widely by geographic region, your clients may have a dilemma when trying to help their adult children buy a home. Offering to give the would-be buyers a percentage of the house’s purchase price (say, 10%) may seem equitable, but it will mean a huge difference in dollars if one kid is buying a condo in Manhattan and another purchasing a stand-alone home in Peoria, Ill. Using percentages could also give the kids an unintended incentive to purchase a more expensive place, since doing so will increase the size of the gift.

Instead, the older generation could state that they will provide the lesser of a percentage, or a flat dollar amount. For instance, either the aforementioned 10% or $25,000, whichever is lower.

Illiquid Assets

Often a clients’ wealth is comprised not just of paper investments like mutual funds and CDs, but also ownership of a small business or real estate. Dividing these illiquid assets equally is hard enough, but it’s even more so when particular members of the family have a greater interest than others in owning and operating the asset.

The simplest, but most capital-intensive, solution is for the older generation to have the asset appraised by an independent expert, gift it to the family members who want it and then give other investments of equal value to those children or grandchildren who have no desire to own the illiquid asset.

These transactions can also be structured as an ongoing or annual series of distributions, especially if the illiquid asset can be divided into fractional shares that can be given each year.

Another option is to have the involved family members purchase the asset from the older generation now, with the purchase financed either by a bank or the sellers. Then the loan payments from the buyers get kicked back into the original owners’ portfolio (and eventually estate) to be distributed equally among the descendants, including the buyers.

Family Heirlooms

Speaking of avoiding conflict, naïve clients might be shocked at how family squabbles can erupt over who gets seemingly-worthless items like an old lamp or a dining room table. Rather than making the heirs take part in a post-mortem battle royal, it’s best for the older generation to adopt a pro-active approach to bequeathing sentimental possessions.

The cleanest, coldest practice is to put everything in a client’s estate up for public auction, compelling family members to put their own money up to beat the highest bidder for a particular item. But a softer strategy would be to have the clients create an inventory of items, and then give each interested family member an equal amount of fictional “points” the child or grandchild can use to bid in a private auction open only to relatives. There still may be some conflict, but removing real money from the equation will level the playing field.  

Kevin McKinley is principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make Your Kid a Millionaire (Simon & Schuster). 

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