Your brother-in-law has asked you to back his new business venture. Your daughter needs help paying her bills during her divorce. The urge to give financial support in these situations can be strong—as is your concern about short-changing your own long-term finances. How can you be fair to everyone, including yourself?
The trick is knowing when – and in what way – to lend a helping hand to your family. The answer doesn’t always have to be ‘No’. But saying ‘Yes’ doesn’t necessarily mean writing a check, either.
Below are three steps for families to follow as they seek the right solution for everyone:
1. Separate the emotional from the financial
Helping family members financially can be hard because there is an emotional aspect to your decision, along with the financial component.
The first step in approaching family requests for money is to strip out the emotional elements and use simple math. It’s neutral and very clear.
What you’ve been asked to do may affect your finances from three angles:
- Cash flow: Decide if giving the asked-for amount might limit your ability to reach your other financial goals or decrease your income.
- Taxes: Could gifting cash use up some of your lifetime exemption? If you would need to sell assets to raise the liquid cash needed, would it generate capital gains taxes for you?
- Bequests: Beware of how an immediate gift to a family member could affect your bequests down the road. Might it create discord among your heirs? Would honoring this family member’s request for an immediate sum mean that one heir receives more than others?
Seeing exactly how opening your wallet could affect the rest of your financial life can spark a discussion about alternatives.
2. Explore What’s Possible
Sometimes, just giving cash is fine. But there may be other options that would be a better fit, such as an intrafamily loan. For example, one of a mother’s three adult children requests a gift of $200,000. Analysis shows giving that amount would create a gift tax problem and inequity among the siblings, as well as prevent the mother from staying in her own home through the end of her life—an important goal for her. She decides to set up an intrafamily loan which will:
- avoid gift-tax issues for the mother
- loan interest rates for the child at about a third of traditional loan interest rates
- keep total distributions among the children equal
- support the mother's personal goal
In other cases, setting up a trust or ongoing gifting program might better suit your need to transfer wealth to a family member in need. Another approach may be to pay some expenses directly, such as tuition or medical bills, as long as you comply with IRS rules so that you don’t accidentally trigger gift taxes.
3. Have the Conversation
Talking about money with family can be uncomfortable even when you’re saying yes.
These conversations are intimate, difficult, rewarding and satisfying. It’s a chance for the leading generation—you—to talk with your kids about money and the values that are guiding your choices.
If the request for capital was to fund a business venture, you should learn more before you can decide how to structure your involvement. Asking for details, such as a business plan and whether you’d become an investor or a partner, is what you would do with any other investment. You should exercise the same rigor when family is involved. View it as a chance to encourage smart entrepreneurship rather than getting someone into a business they’re not prepared to run well.
Refusing a request to a child
Saying “no” to a child can be much more difficult because of the emotional elements involved. Parents may fear damaging a relationship with a child over money. But they may do greater damage by freely handing over cash to a child who’s not ready for it. Giving too much too soon often de-incentivizes the next generation from taking accountability for their own lives.
Most often, an adult child who is told no will maintain the family connection. Then, they will either continue in their status quo, or will repair money problems on their own—especially when parents have taken time to explain their decision.
Family governance can lead the way
Some wealthy people rely on family governance systems which give future generations a clear roadmap to follow when it comes to making wealth and legacy decisions. While there’s no single way to handle family requests for funding a strong family governance system can help take some of the guesswork out of the process, leading to fewer conflicts and the potential for long-term preservation of the family’s wealth and values.
For more information, please consult your PNC Advisor or contact PNC Private Bank.