By: Kory Gildea

09/18/20

For many people, college is viewed as a place and time of freedom and independence. Students enter as naïve teens, and leave as adults ready to take on the real world. Students form new opinions, enhance their education, and learn what it means to handle responsibility and act for themselves. Unfortunately, one area that often gets left by the wayside during all of this growth is their personal financial development.

In these treasured college years, many of America’s youth disregard financial responsibility and instead choose the mentality that money, or the lack of it, is a problem for their future selves to deal with. However, this frame of mind only delays the struggles and errors which inevitably come as young adults begin to handle their own finances. If you’re a parent with a child who is in high school or college, now is the time when you can help teach your children how to make sound financial decisions, even if for the time being you’re providing the bulk of their financial support.

The most obvious opportunity for you to teach your children how to get their financial lives in order is to discuss the exciting topic of budgeting with them! As a recent college grad, I know all too well that tracking where you spend your money in school isn’t always a fun thing to do, especially when the weekend’s charges hit your credit card. However, budgeting doesn’t have to be some horrible task that you agonize over. Budgeting comes in many forms and you can be flexible with how you and your child approach the matter. If together you both decide you would like to track every expense, that’s great, but it may not be realistic. An alternative would be to sit down and figure out what weekly or monthly expenses look like, and work from there. This could be as simple as allotting X money for rent, Y money for food and other bills, and then any extra spent is just “social”. It’s more important to instill the habit of spending within their means, than it is to actually know where every single dollar goes. Additionally, it’s important to prevent budgeting as coming across as a punishment or a chore. This should be a tool your child can use to help guide future decision-making, not something eliciting shame.

Having your student pay his or her own bills each month is another valuable skill to develop, even if they’re not ultimately the ones providing the capital for said bills. When your children communicate with the Power Company, or landlord, or whoever else is charging money for a service, they’re learning to depend on themselves rather than on you. They also begin the act of paying bills monthly, seeing the money leave their account, and learning the consequences firsthand of what happens when they leave a window open all month in the summer heat. We are creatures of habit, and the earlier your child develops the habit of monitoring their financial responsibilities and addressing them directly, the easier their transition to full financial independence will be.

If your child manages to find themselves with a cash surplus, this is a great time to discuss putting money away in savings, or putting money aside to give to charity. Unfortunate as it may be, it is ingrained in many young people’s DNA to spend every last dollar they have, so the prospect of doing otherwise will likely be met with resistance. However, if your student can afford to do so, this is the perfect time to shift their focus from “wants” to “needs”. This is especially true after a summer job or internship where the student’s pockets might feel just a bit heavier. It’s best to start small here and habitualize the act of saving small amounts consistently, as opposed to expecting meaningful capital to be put away.

As a parent, this is also an important time to make sure your child has begun building and understanding credit. Should your child graduate college without forming any kind of credit history, or having already created a poor credit history for themselves, then it’s likely they’ll face additional, unnecessary challenges as they experience the real world for the first time. Already complicated situations like renting an apartment, or making a first car purchase, get only more difficult for a young adult when they’re weighed down by mistakes they made unknowingly early in their financial life. Use this time to make sure your child understands what credit is and how it can potentially impact them down the road. Once your child has a solid understanding, you can ease them into building their credit through various actions such as opening a checking account for them, or cosigning on a credit card with them. Upon taking these additional steps, you should once again make sure your child understands the new responsibilities bestowed upon them, and the potential impact that inappropriate financial decision-making can have.

Handling money is just like playing a sport or painting or anything else we do, it takes practice and time to acquire skill. As a parent, your children look to you for guidance, and so it’s important that you instill in them the productive habits that are required for them to make sound financial decisions. With a little help early, you can spare them much pain ahead.

By: Todd Hall

08/10/20

In a low-interest rate environment, loans to children or grandchildren (intra-family loans) can be an effective way of assisting family members while keeping wealth within the family. Such loans can be for many purposes, such as assisting with the purchase of a home or car, paying off higher interest debt, or starting a business. There are several uses of intra-family loans in more complex wealth transfer plans as well. A properly structured intra-family loan has many benefits, including:

• lower interest rates for the borrower compared to commercial loans
• greater flexibility than commercial loans (e.g. any number of years)
• loans can be made with no credit checks or reporting if desired
• origination and other transaction fees can be avoided

Interest Rates Used

There is a minimum interest rate that must be charged on intra-family loans in order to avoid adverse tax consequences. The rate that must be charged is called the Applicable Federal Rate (AFR) and is published monthly by the IRS. The rate is based on the term of the loan as follows:

• Short-term — Three years or less
• Mid-term — More than three years and up to nine years
• Long-term — More than nine years

As of August 2020 the AFRs are: 0.17% for short term, 0.41% for mid-term, and 1.12% for long term loans. This means a parent can create a 30-year loan to a child for 1.12%, while commercially available mortgages are around 3%.

Properly Implementing Intra-Family Loans

The IRS presumes a transfer of money to a family member is a gift unless it is properly structured as a bona fide loan. Before implementing an intra-family loan, consult with qualified tax and legal advisors to confirm it is set up properly and will be honored by the IRS. Best practices include:

• Sign a promissory note
• Establish a fixed repayment schedule and ensure payments are made
• Set a rate at or above the AFR in effect when the loan originates
• Secure or collateralize the debt
• Maintain records that reflect a true loan transaction
• Avoid having a prearranged schedule to forgive the loan
• Lender should report interest income, and if applicable the borrower may deduct interest payments (e.g. for a properly secured mortgage up to a loan size of $750,000)

If properly structured and maintained, intra-family loans are a technique that can have significant benefits for both the borrower and the lender.

How can you decide between saving for important goals and paying down debt balances? HB Principal Michael Landsberg, CPA, CFP®, CPWA, PFS lists out a few common rules of thumb to follow. Read full article here.