When To Give Inheritance Money To Your Kids
Is it better to help your children when you’re still alive? Or wait until after you die?
Is it better to help your children when you’re still alive? Or wait until after you die?
Should an inheritance be strictly an inheritance, to be left to children when their parents die? Or should parents use at least some of that money while they’re still alive to help out their adult children financially? And if parents give while they’re alive, how much should they give and when?
Of course, every family is different—both in terms of what they can afford and what brings them joy. But there are some things every family should consider when deciding how to pass wealth from one generation to the next. The Wall Street Journal invited three financial advisers to discuss those issues: Michael Garry, founder of Yardley Wealth Management in Yardley, Pa.; Jacqueline B. Roessler, certified divorce financial analyst at the Center for Financial Planning in Southfield, Mich.; and Tony Walker, a retirement-planning specialist in Louisville, Ky.
Here are edited excerpts of the discussion.
WSJ: How do you advise clients on the topic of the timing of inheritance?
MR. GARRY: I believe strongly that parents should dole out money while they are alive and not stockpile it any more than they need to for their own financial security. The people who make gifts during their lifetimes are able to help their children, and maybe grandchildren, at the exact time they likely most need the money, and not based on the random date of their death. They also get to see the benefit of the gift to their children and grandchildren. The extent of the gifts depends on how much the parents can afford.
MS. ROESSLER: It depends on their personal goals, tax situation and current financial needs, as well as the financial needs and tax situation of their heirs. First, they need to make sure they have enough resources to cover their own financial needs, including any potential long-term-care expense. Once that’s established, they should discuss gifting strategies with their adviser, keeping in mind the parents’ ultimate goals, such as minimising income taxes and capital-gains taxes during their lifetime, spending down their assets to later qualify for Medicaid, or providing for their children’s specific financial needs.
MR. WALKER: I’m a firm believer that too many people save every penny until the day they die, instead of spending their money now. With so many savers maxing out contributions to their 401(k) plans, my concern is that most of them have no plan for using and enjoying their savings before it’s too late. There’s a struggle going on with my clients when I broach this subject of saving too much for the future. They wonder: Will their children be responsible with the money? There’s only one way to find out, and that’s throw them a bone now to see how they handle it.
WSJ: With the pandemic wreaking havoc on many families’ finances, have you seen families change the way they are thinking about inheritance?
MR. GARRY: Most of my clients are in much better shape than they were a year ago. Unfortunately, a lot of their children and grandchildren are not. We’ve seen a real uptick in people expressing gratitude in being so fortunate with their health and finances and not wanting to wait to help both their offspring and their favourite charities.
We’ve had people who have kicked the idea around for years but never did it who are actually taking steps now and making gifts. They seem to realize more than ever that they don’t know how much time they have, and some of their kids have been unemployed for much of the last year. I don’t think many of them ever expected to see their children hurting so much, and it has moved them.
MS. ROESSLER: I haven’t seen families make dramatic changes to their legacy planning, at least not yet. However, as government aid ends, many millennials will be left without jobs and with increased expenses. In conversations with older clients, they are prepared to begin making adjustments in their gifting strategy to accommodate changing needs.
WSJ: Should there be strings attracted to parental giving?
MR. WALKER: This is a gift and shouldn’t come with any strings attached. Still, how your kids and grandkids react might certainly sway future considerations as to whether you wish to continue the gift-giving trend.
MS. ROESSLER: I think it depends on the family circumstances. Some parents may feel their children need guidance on how to wisely spend gifted dollars; others aren’t comfortable attaching any strings to gifts. One family I’ve worked with requires their adult children to donate a portion of their annual gift to a worthy charity. Another family specified that the gift must be used toward college costs for their children or major expenses such as a car or down payment on a home.
WSJ: How can parents who want to help their children while they are alive prevent themselves from becoming their children’s bank?
MR. WALKER: Before starting the gift-giving trend, it is important for parents to speak about their finances frankly with their children. While you don’t have to take all of your financial clothes off, you need to be frank with them as to how you’re doing financially. As well, blend into the mix that you are very grateful for the way you have been blessed and your desire to share some of your good fortune with them now—at a time in life when they can use it—versus waiting until after you die. Also, never tell them that there’s more where that came from, as you might regret setting up such an expectation.
MR. GARRY: It makes it much easier to avoid being the bank if the child knows that the gift is for a specific purpose, like to pay their health insurance, or go toward their student loans, or make their IRA contribution or for a deposit on a property. I’ve also told my clients they can feel free to tell their children their financial adviser has said they can’t afford to make that gift or even make any more gifts, depending on the circumstances.
WSJ: What are some common mistakes you see parents making in deciding how to transfer wealth to their children?
MR. WALKER: Not understanding that the value of their 401(k) actually will go down over time. That is because between future taxes and inflation, the money they are stockpiling will be worth less then than it is now. Think about it: What if, instead of socking it all in a 401(k), you could give some money away to your kids now with no tax to them? Wouldn’t that make more sense?
MS. ROESSLER: Some parents give more than they can afford and wind up with an unintentional reduced standard of living. This can lead to marital tension when both spouses aren’t on the same page. There is also a substantial tax advantage to transferring stocks and mutual funds after death versus during your lifetime, though this could change under President Biden.
MR. GARRY: The biggest downsides come when gifts are given with no discussions around expectations. We had a client who, before coming to us, went through a bit of a rough patch with his son and daughter-in-law. He had made gifts for a few years to them around Christmas and he didn’t say anything about it other than “Merry Christmas!” Well, after three or four years of those gifts, the son and daughter-in-law expected them to continue. Without saying anything, he just stopped because he wasn’t in the financial position to continue. But they didn’t understand that and there was tension until they finally talked about why he had discontinued giving and they were able to heal the rift.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: April 30, 2021.
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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