UPCOMING EVENTS

SEMINARS FOR SEPTEMBER 2017

MONROEVILLE
Tuesday, September 12, 2017
2:00PM
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22

MURRYSVLLE / DELMONT
Tuesday, September 12, 2017
7:00 PM
Holiday Inn Express
Delmont/Murrysville
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant on Rt. 22

MURRYSVLLE / DELMONT
Thursday, September 14, 2017
2:00 PM
Holiday Inn Express
Delmont/Murrysville
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant on Rt. 22

MONROEVILLE
Thursday, September 14, 2017
7:00 PM
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22

MONROEVILLE
Saturday, September 16, 2017
9:30 AM
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22

 
 

 
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How To Raise A Money-Conscious Grandchild for $10,000

I am blessed to work with many families who have done a good job of investing in themselves and their families to create a financially comfortable situation in retirement. Comfort doesn’t mean excess, and doesn’t guarantee nothing bad will ever happen, but it does mean that as a result of hard work, careful planning, and attention to detail, you expect that things are going to be fine for you.  Such clients are often worried whether their grandchildren will have the same opportunities in the bankrupt world we live in today, and ask for guidance on how to protect their grandchildren.  We have a wonderful array of estate planning strategies available for this, however in this article I want to discuss one option: Creating a secure million-dollar retirement for a grandchild who will understand the value of money.
 
The essence of creating a 7-figure retirement for your grandchild is making better use of the gifts that you may already be providing to them. Many of my financially comfortable grandparents are using the annual gift exclusion ($14,000 per year in 2013) to give tax-free gifts to grandchildren. Some of those gifts are outright to the grandchildren, and some are to UGMA (Uniform Gift to Minors) accounts with a parent in charge until age 18 or 21.  While such gifts are unquestionably wonderful, what are we accomplishing?  The child receives the gift, with some level of gratitude (depending upon their appreciation of the power of money).  The money either sits in an account, or gets spent on something disposable (car, clothes, etc).  By the time the child is legally an adult, the money is spent, or soon to be spent, in many circumstances. The gratitude for the gift disappears with the balance of the account.  Don’t get me wrong; I think these gifts are a wonderful and loving gesture, but can we do it better? 
 
As an exercise, suppose instead of making an outright gift to the grandchild, we ask them to come do some work for us?  Even a 10 year old child could do basic chores inside and outside the home, and as they get a bit older, assist you with paperwork and other items. You also get to see them more.  Now we are teaching them the link between effort and reward.  If they don’t live close enough to you, you could pay them to assist their parents around the home (now the parents are getting value as well!), or encourage that time in efforts to assist community efforts, charity, or even academic assistance to younger siblings.  Further, because it’s grandma or grandpa paying, you can pay them well. Let’s say you pay a 12 year old $10.00 per hour for such work.  That is the best job in town! As they age, you can increase the hourly rate, and still make sure that working for you is the greatest job in the world, helping someone they love, or the community, and making more per hour than anyone they know. Behind the scenes, however, they are learning important lessons about the value of effort and helping others.
 
The temptation to pay cash “under the table” is great, in order to maximize the amount in their pocket, but I am going to add a twist. Hire a bookkeeper service to inexpensively prepare a quarterly withholding statement, and issue a 1099 or W-2 to the grandchild each year.  Now the grandchild is becoming conscious of how the tax system works, the value of making tax-sensitive decisions, and the concept of filing tax returns. I can’t tell you how many people in their twenties and thirties are still mystified by how the tax system works. Let’s create knowledgeable worker, not mindless minions. 
 
Your child’s reported taxable income is going to result in some income tax (likely mostly refunded to them – April Bonus!), and paying some FICA tax to social security.  In 2013, earning as little as $1,160.00 in a quarter qualifies that employment as a credited month for social security purposes.  Why do we care?  First, if your grandchild suffers an injury or medical condition early in adulthood which renders them disabled, we have just qualified them for Social Security Disability benefits (SSD), including income and medical benefits. Many people overlook that the SSD system requires up to 40 credited quarters of employment paying into the system (a lesser amount of quarters for younger workers).  A few weekly hours of ‘work’ for you, family or community has created this valuable coverage. Without it, I have seen injured or sick young people forced to resort to the Supplemental Security Income program (SSI), which pays far less in benefits, and terminates their benefits if they ever have more than a few nickels of their own in their pocket. In addition, these credited quarters all count toward future Social Security retirement benefit qualification, which may become relevant if their work life is cut short by injury or illness later in life.
 
My goal in this scenario is for the grandchild to earn about $5,000 per year. That would be roughly 8 hours per week at $12.00 per hour.  That’s money they can spend, save, or contribute to their own savings.  We all know, however, that money earned means more to someone than money just dropped in their lap. The grandchild is going to make more deliberate decisions about what happens with this money from you. Remember, however, that I said we are going to use a $10,000 goal.  With the remaining $5,000, I am proposing an outright gift to the grandchild, but with a string attached; they have to deposit it into a Roth IRA account for themselves.  An individual can contribute up to $5,000 per year into a Roth account, not to exceed the amount of earned income they have.  Well, they now have reported earned income from working for you, so they qualify for a Roth IRA.
 
The beauty of the Roth IRA is that now we are creating retirement growth accounts, with enormous tax and protection benefits.  A Roth IRA grows without income tax, and the money comes back out of an IRA tax-free if you follow the rules. Thus, not only have we created a saving vehicle for your grandchild, but one which can be tax-free.  Assume that your grandchild works for you under this plan for 10 years, say from age 10 to 20.  You are providing a $5,000 gift which they are allowed (and you require) to deposit into the Roth IRA. Young people can afford a risk-based investment strategy, but let’s assume a conservative 7% average growth rate.  After those 10 years, the Roth IRA is now worth $74,000. That alone is an amazing gift from you, but it is even better than you think.
 
When a child is applying for financial assistance for college, from government or the university, the aid programs expect that a child is going to use their own income and assets, including UGMA accounts created for them, to pay for those expenses, and reduce their aid accordingly.  Guess what isn’t considered in that calculation? Their Roth IRA.  For college aid, their retirement accounts are considered off-limits, so your gift hasn’t impaired their college aid program.  If your child needs the money for college, it is still available to them, and college tuition counts as a tax-free distribution event, so they get the best of both worlds.
 
Lets encourage our grandchildren, however, not to use this money for college. Truth be told, few people fail to attend college because they can’t find a way to pay for it, and other options are available. Instead, let’s tell them to let the money ride.  Even if your child never makes another deposit to the IRA after those first 10 years, and they just let it stay invested, you create an enormous account for them because they get to take advantage of the wonderful power of tax-free compounding from a very young age.  Just letting that money sit, invested at 7% on average (including dividends and gains), tax-free all along, will provide your grandchild with an account balance of $1,030,000 at age 60, and the entire amount is tax-free. That is in addition to the $5,000 they earned working each year.  Jackpot!
 
How did we do with our goal of a money conscious grandchild?  We took about $100,000 in total, and created grandchildren that see the value of work and helping others, taught them about taxes, tax returns, investment returns, and how to make money work for you.  We created a tax-free savings vehicle, and got money into it decades before most of their peers started even thinking about saving for the future. We provided spending money they earned each year, approximately $50,000. We empowered our grandchildren with a great starting point to build enthusiasm and excitement for their own saving programs as they mature. We saved this money in a way which doesn’t interfere with their college aid applications, and yet is available for college if they need it. 
 
We also have created an account which has tremendous asset protection. If the grandchild gets sued, has creditor problems, defaults on a loan, or has to file bankruptcy, the Roth IRA account is usually protected for them to keep.  If the Roth IRA you helped them create is kept separate from their own retirement savings during a marriage, the account is likely to escape being divided in the unfortunate event of a divorce proceeding. If your grandchild passes away, they can pass the Roth IRA to their spouse or their own children, and it remains income-tax free. And remember, you just created $1,000,000 for them, if not more. Even if your gifts are smaller than those described, the same concept still applies, though the numbers would obviously still be proportionately different.
 
Just a thought…