August in Minnesota means the State Fair, Twins and Vikings blowout losses, the last few days at the cabin, and “back to school” events. While my children are still a few weeks away from starting school, friends and clients are already seeing their young adult children off to college. In this month’s advisory update, I thought it would be appropriate to summarize two sets of legal problems we are addressing on behalf of parents with young adult children: (i) first, how the young adult children of our clients, many of whom are “flying the coop” for the first time this fall, can legally authorize their parents to gain access to their financial and health care information, and (ii) second, how our clients can financially assist their young adult children who are “setting out on their own.”
Fiduciary Authorizations
Parents of college-age children express frustration over their inability to gain information about, and in some cases make decisions for, their young adult child who are attending higher education institutions. The universities seem to know where to send the tuition invoice but will not grant the parent access to the child’s financial or health care records. To avoid such frustrations, the appropriate legal documents can be prepared by which a young adult would name his or her parent(s) to hold the appropriate levels of legal authority. In addition to specific documents provided by the educational institution, I recommend the following three legal documents:
- Power of Attorney. If parents are named to act on behalf of their children, they would have authority to handle his/her financial affairs, either in conjunction with, or in lieu of, their child’s own legal authority.
- HIPAA Authorization. A signed HIPAA Authorization would authorize parents to have access to child’s medical records, regardless of the child’s health situation.
- Health Care Directive. If parents are named as a child’s health care agent(s), the parents could act if the child became unable to make his or her own decisions.
Our firm has assisted adult children of our clients execute these documents just as they have “flown the coop.”
Financial Assistance
Additionally, we have advised many of our clients consider their best way of providing financial assistance to their Millennial-age adult children. The COVID-19 pandemic, together with the negative economic fallout from the pandemic, seems to have hit the “Millennial” demographic disproportionately hard. According to a Federal Reserve study, and as summarized in a recent Wall Street Journal article, many Millennials are struggling with unusually high debt-to-income ratios and have therefore delayed home ownership and starting a family. Compared to similarly-aged individuals in 1989, Millennials had 12% less wealth in 2016 than a person of the same age in 1989. Millennial-age children of our clients are receiving help for their post-secondary educational debt and/or their home ownership costs.
Student Loan Debt. Starting in the 1980s, the annual increase in tuition costs have been double the rate of inflation, according to the U.S. Labor Department. The total national student loan debt now stands at approximately $2 trillion.
Home Ownership Costs. Based upon the median annual income of a person who rents in the Twin Cities, if a renter saved 10% of her income on a monthly basis, the renter would need 10 years and 4 months to save enough for a 20% down payment on a starter home in the Twin Cities, the median value of which is now $249,454.[1] In the absence of outside financial help from family, home ownership would therefore seem to be out of reach for many Millennials.
Strategies. Many of my clients have recently implemented one of the following strategies to help their Millennial-age young adult children:
- Gifts. Clients have made gifts of cash or other assets to their children, either on a one-time basis or over a specified time period. As noted in a recent advisory update, gifts made to any one child in a calendar year of $15,000 or less ($30,000 if married) will not be considered a “taxable gift” and thereby require a gift tax return.
- Intra-Family Loans. Even if my clients could afford to make a gift, some clients choose to structure the transfer as a low-interest rate loan. While in some cases the loan allows for our clients to preserve some cash flow for retirement planning purposes, in most cases the loan structure is primarily a means by which the Millennial can learn personal cash flow management and financial stewardship abilities. If the cumulative value of all loans made to a child is less than $10,000, the IRS does not mandate a minimum interest rate on such loans. However, if the total loans are in excess of $10,000, a minimum interest rate must be charged.[2] As opposed to loans from third-party lenders, intra-family loans have friendlier terms than loans offered by a third-party lender, including the ability to forgive the loan in part or in whole at a future date.
- Co-Ownership of Residence. As I noted in a recent advisory update, some clients are entering into co-ownership arrangements with their adult children in which our clients are living together with their children under one roof. Other clients are entering into co-ownership arrangements with their adult children not to live in the co-owned property, but as means to enable a child to become a homeowner while also retaining an equity interest in the property.
The Importance of Coordinated Financial, Tax and Legal Planning.
I am currently working with a client who has implemented what I might refer to as a “laudably deceptive” gift strategy. While the clients have told their adult children that they are being required to repay amounts previously provided as ostensible loans, the clients are keeping these “payments” in separate savings accounts. The plan is that these accounts will be “re-gifted” back to each child at a future date. Particularly in these types of situations, it is important we assist our clients with the legal and tax issues, including (1) how assets are owned as between adult children, our clients, and their revocable trusts, (2) whether unequal lifetime gifts as between children are considered “advancements” against a child’s share of assets received following death, (3) whether gift tax returns are necessary based upon the value of the gifts, and (4) what interest rates are being charged to the children and how such interest payments are being reported to the IRS.
Just as in other types of estate planning discussions, gift planning strategies require the careful cross-disciplinary communications with our valued professional advisors. We would be glad to assist you and your clients address these issues, whether the fiduciary authorization and appointment designation documents for college students, or discussions with clients about loan or gift strategies for their young adult children.
[1] According to Zillow.com, and as reported in the Minneapolis Business Journal on July 16, 2021. Five years ago, it took such a renter about 8 years to save up enough equity for a home purchase. According to Zillow, the median household price will continue to grow at a 14.9% pace over the coming year.
[2] For “mid-term” loans made in August, the minimum interest rate charged is only 1%.