A Gift for Today and Tomorrow

Sara, a young adult beginning to balance her lifestyle spending and investing, doubled her investments and boosted her tax savings with a gift — paired with insightful guidance from her grandfather.

• Families can use annual gifts to help younger family members invest at reduced prices with the advantage of growth over a long time horizon.
• Parents or grandparents can use annual gifts as a way into a productive conversation with younger generations about saving, rather than treating every gift as a chance to spend.
• By considering all your financial resources across all family members, you may find additional ways to leverage depressed prices.

This series offers examples of how families can shift assets among generations to make the most out of a difficult market. Read the rest of the series here.

Situation

Good advice that is hard to take

Fred is a 73-year-old retired business owner who lives comfortably on returns from his invested savings.

He has lived, worked, saved and invested through several market cycles and feels confident that downturns always reverse in time. Plus, he has a plan to fund his near-term expenses from selling so-called “safe” assets (stable diversifiers, such as high-quality fixed income, Treasury Inflation Protected Securities and cash) so he can avoid selling equities at depressed prices. He is confident that his longer-term goals, such as his estate plan and regular gifts to family, are aligned with the amount of risk he has built into his portfolio. Fred looks forward to giving his five adult grandchildren the maximum tax-free cash gift every year ($17,000 in 2023).

His 26-year-old granddaughter, Sara, is a first-year associate at a midsized law firm in the San Francisco Bay area. She is new in her career and frustrated with the “good advice” to invest as much as she can to take advantage of tax-deferred saving, compounding returns and the market downturn’s depressed asset values.

Solution

Investing, with income for now

Fred knows there is a way for Sara to use his gift to both save and cushion her income. He invites her to lunch with his financial advisor and they work out a plan.

Sara’s retirement plan is the most tax-efficient investing vehicle she has available to her, so they outline a budget that allocates Fred’s $17,000 gift among her monthly expenses, which allows her to maintain her lifestyle spending while contributing the annual maximum to her 401(k).

Outcome

The math: Lowering taxable income

By using her grandfather’s tax-free gift to backfill her monthly budget and maximize her 401(k) contribution, Sara is able to both invest at low asset values and reduce her taxable income by the amount of the gift.