Unless You Plan Carefully, Your Plans To Help Your Children Financially Can Backfire
Creating generational wealth is one of the most common reasons that people cite for contributing money to their own retirement savings accounts. The goal is to save more money than you will need to spend in your lifetime, so that your children can inherit the rest. Of course, you don’t have to be an economist to know that your children’s generation faces more difficult economic times than you faced at their age. Housing, education, healthcare, and almost everything else are more expensive than they were 30 years ago. It only makes sense, if you have some money saved, not to make your children wait until after you die before they can benefit from the money that you have saved. Giving money to your children or paying certain expenses for them will only help in the long term if you do it based on long-term strategy. Acting as an ATM to fulfill your children’s immediate financial needs as they arise will make everyone’s financial situation better in the long term. A Tampa estate planning attorney can help you figure out how much money you can afford to give to your children while still ensuring that you have enough for your own retirement.
Reducing Debt or Just Passing It Around?
Most retirement savings accounts will let you withdraw money early, but doing so is not cheap. Not only do you have to pay early withdrawal penalties, but income that was otherwise tax-free now becomes taxable. Do not take money from your retirement savings to help your children unless it is your only option.
It is a better idea to give smaller cash gifts based on your ability to afford them, not on your children’s need. For example, it is better to give your children $5,000 each year (or however much you can afford, as long as it is below the annual gift tax exclusion threshold of $17,000), even in years when they insist that they don’t need it. They can keep the money in their own savings accounts to earn interest on it, and when they are ready to buy a house, they can use it as a down payment. They might even use it to pay off debts instead of saving it. Either way, you are being proactive instead of reactive in giving.
If you are sure that you don’t have enough savings and that you will eventually need Medicaid for nursing home care, then giving cash gifts earlier instead of later is also in your interest, because you will not run the risk of being disqualified from Medicaid based on the five year look back rule. Likewise, you should transfer possession of your house to your children sooner rather than later to avoid Medicaid estate recovery.
Contact David Toback With Questions About Helping Your Children Within Your Means
A Central Florida estate planning lawyer can help you plan to provide financial support to your children slowly and consistently over a period of time. Contact David Toback in Tampa, Florida to set up a consultation.