Finding Financial Opportunities Across Generations

By:  Jim Edwards | CFP ® – Financial Advisor & Portfolio Manager

We are at interesting generational crossroads these days between the well- to-do “baby boomers,” who have large investment accounts, and their children, who have lesser means and are sometimes struggling to find consistent employment.  For the right family circumstances, however, there are strategies that can provide financial advantages for both parent and child alike.

First, in scenarios where children may  be unemployed or in a lower income-tax bracket and are struggling with monthly bills, school loans, or other costs, parents could gift some of their appreciated assets, such as stocks or mutual funds. Per the gift rules, each parent can annually gift up to $14,000 to each child—i.e., $28,000 total per couple to each child—without filing a gift-tax return. For children whose income is less than $36,900 ($73,800 for married couples), the sale of the assets would be completely free of taxation this year, because the lowest two tax brackets have a 0% capital-gains rate. The children could either sell the asset and use it at their discretion or use it toward longer-term goals such as a home purchase. In other situations, that gift could be an income- producing stock or bond that would provide dividends and interest to the child—which, again, would be taxed at the child’s likely lower rate.

By transferring a parent’s potentially high-tax investment to  lower-tax-bracket children, parents reduce their taxable interest income and subsequent income taxes.  This effectively shifts income from a higher tax bracket to a lower one, reducing the overall tax liability, while still keeping it in the family.

Finally, if there is one financial need that often gets the attention of a parent or grandparent, it is helping their child or grandchild with college funding. Upon turning 18, children could accept a gift into their own personal brokerage account and then sell that same asset and use it toward tuition purposes—again, with no tax consequences (as long as their income is below the above thresholds). For financial aid purposes, though, this would be considered an asset in the child’s name, and this strategy should be considered carefully before making the gift. This strategy is especially effective, though, for parents or grandparents who have a portion of their investments in highly appreciated stock that they are unlikely to ever sell, and that is not necessarily needed as a source of retirement funds.

The advantage to parents in all of these instances is that they have removed an investment from their account that lessens their current or future tax liability, while at the same time, doing something beneficial for their children.