Do your children or grandchildren need some financial assistance?
Here are 3 Easy Ways to help them:
1) Make a Loan
Parents and grandparents can loan to their child or grandchild. If this is the approach taken, a formal loan agreement should be drawn up. This should include interest and the repayment terms. The Internal Revenue Service (“IRS”) will require a minimum amount of interest to be charged. This is known as the Applicable Federal Rate (“AFR”). This rate is updated every month. Keep in mind; this is just the minimum interest rate. A higher rate can always be charged.
By making a loan you are teaching (or re-teaching) the child or grandchild how to manage their debt. This is a very valuable lesson to learn early in life.
2) Make a Gift
The simplest way to help your children or grandchildren is to give them a gift. You can give up to $13,000 per year to an unlimited number of people annually without having to file a gift tax return or pay a gift tax. A married couple could give a combined gift up to $26,000 per recipient. There is an additional unlimited gift tax exclusion for qualifying medical and higher education expenses also. This additional exclusion applies only if the payment is made directly to the medical provider or the educational institution.
Caution should be exercised here. Even if you wanted to make the maximum gift, it should be reduced by some amount. If you are making birthday, holiday or other gifts, you wouldn’t want to inadvertently go over the $13,000 annual exclusion and then be required to file a gift tax return.
Although the donor does not get an income tax deduction for the gift, they do remove this asset from their estate.
Although it’s not required, it’s recommended that a simple gift letter be given from the person making the gift to the recipient. This will help the recipient if they are ever questioned by the IRS about where these funds originated from.
3) Co-Sign Their Debt
Children or grandchildren may need to have a car loan or other type of loan co-signed as they may not be eligible for the loan on their own. Parents and grandparents can of course co-sign the debt of their children or grandchildren. Although you can do this, I would not necessarily recommend it. This co-signature will show up on the parents or grandparents credit report. Additionally, these loans are typically “joint and several.” This means if the child or grandchild does not pay, the co-signer is completely responsible for the debt.
ACTION ITEM: Many children and grandchildren certainly can use some financial assistance in this economy. If you can, make a loan to them.
Thomas F. Scanlon, CPA, CFP®