In this month’s edition of “Money Matters,” Scott discusses keeping your finances top of mind during the holidays, so people don’t overextend themselves. He gives several examples of gift-giving ideas that won’t break the bank and will leave long-lasting memories. Scott also covers the parameters surrounding gifts of money, property, and other financial gifts.

Money Matters: Holiday Financial Planning & Gift Giving Transcript

0:00:01.2 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals, and Scott joins us now by phone. Welcome, Scott.

0:00:25.9 Scott Oeth: Good morning, CJ.

0:00:27.8 CJ: Good morning to you. So, we're in that holiday season, and you said you had some thoughts about gifts and money. What's on your mind?

0:00:36.7 SO: Yeah, we traded some messages. I thought this would be a great topic given the season. The thing is, CJ, the more I thought about it, I realized this is a huge topic. There are a lot of ways this could go, but I did have some thoughts about if funds are tight, making money decisions around gifting. Then, on the other end, if you're in a happy position of abundance, a few tips there, and some of these touch on some technical tax and financial planning topics. So, remind listeners, as always this is general discussion and please seek your own expert advice.

0:01:10.3 CJ: All right. Well, let's get started. So where do we start with this sort of perennial problem?

0:01:20.2 SO: Yeah, if funds are tight, I think there's a perennial problem, and it's maybe more acute this year. Inflation has been very high. You and I have talked about that many times, and recession concerns, which aren't a fun prospect, and that's looming on the rising. I've talked about that before, where you think about your job security and prepare yourself for the future. So, I don't want to sound like Mr. Grinch or Scrooge here and really dampen the mood, but, ideally, you've budgeted a suitable amount for yourself, and you stay within your budget and don't gift what you don't have—and this is tough, and it's not an easy thought—but you're not doing your family, your friends, or your network a favor by jeopardizing your own financial security by funding the expensive holiday gifts on a high interest rate credit card that's going to cause problems down the road. So, ideally, to get ahead of things, I like goals-based budgeting, where you think about your big goals, and you prioritize them, and you put them on a timeline, and you work to fund those goals, and you have dollars just directed to accounts dedicated to those goals.

0:02:30.6 SO: I find that's easier than starting with a number and kind of trying to break that down. Say, what do we need to put towards these things, like maybe an emergency fund or a home purchase or your future retirement or education. And that can help the many, maybe meaningful but smaller, distractions along the way from sabotaging your overall financial plan. Those are tough decisions, but something I learned from involvement in fundraising and charitable giving and being on that side of things is they'll use the term, what do you have to give? Time, talents, and treasures. I think this works in a family setting or a personal setting as well. And time, of course, we hear a lot about how experiences can be more special than things and more memorable, and I think about special moments in my memory, going skiing with family or fishing or time on a campfire and even something as simple, CJ, I have a boy who just turned seven, and I found that us reading a book together, not just giving him a book, but we almost make it like a little adventure and build it up, "Hey, we're going to read this together. This is exciting. This is what we're going to learn." We talk about it. The simple purchase of a used book and us sitting down gives us a couple hours together over the course of a week that are really deep. So, I like that and have thought about that even with Christmas, big dealing, some books that will be gifts that we're going to spend time together. And the talents, I'm not all that crafty, unfortunately. I have some wonderful family members who are, and I've gotten some really nice paintings and things that are knit and sewn. I think that's wonderful. I do have some skills I can teach, though, and time to time I do that. I take people out. I think I'm a passionate canoeist. I'll take people and tell them, "I'm going to show you how to canoe and how to run a river with rapids or how to have a successful Boundary Waters trip." So, is there something you can teach, something in your talent spectrum? And then you get to treasures. I think maybe that's last. That's the first thing we think about buying something, but maybe the monetary piece should be last.

0:04:29.9 SO: But a few things that I've seen work well there, CJ, in my family, we've gone many years ago to the Secret Santa concept with a dollar limit, and that's kind of nice because between brothers and in-laws and nephews and nieces, each person's only buying one gift and it's a defined dollar amount. It makes it kind of fun. I've also had in the work environment the White Elephant game, where maybe you're buying a small dollar amount. Maybe it's something even from a thrift shop and it's almost more fun if it's something goofy and you go through the swapping of the gift and passing it on, and it makes a fun experience out of it without necessarily having to spend a lot of money. So, there's maybe a few ways on the constrained budget to have some fun with gift giving.

0:05:18.2 CJ: I really like that idea. And as you were talking about, you have skills that you could teach people about like canoeing or whatever, putting together a little gift certificate that says something like, "I'll come down and dog sit, so you guys can take a weekend off or I'll babysit for a weekend," putting gift certificates like that in the stockings is pretty fun, too.

0:05:41.8 SO: Yes. Yes. I mean, I know from my peer group, one of the most valued gifts, I think, for people who have young families is maybe some babysitting time. It's just very, very, very precious. The ability to maybe go out for a special dinner and have someone help watch the kids or be able to go to a movie or just a little bit of time can go a long way, even a few hours in the hectic life that we all live now.

0:06:09.0 CJ: Indeed. All right. So, if you are in a position to make a monetary gift, what are some suggestions you have?

0:06:18.2 SO: Yes. So, this is an area that is a fun one. When people have come into position of financial abundance, and they're feeling generous and thinking, "What can I do to help others?" It's a really neat area, something I spend a lot of time on, in the office working with my clients. It does get fairly complicated. So, here again, seek your own advice and your own research for getting specific tax laws and financial planning calculations, but one thing to be aware of, believe it or not, there actually is a gift tax. So, there is a tax on transfers of large monetary value to another individual, and this, I think, can catch some people by surprise. Many people are aware of it, but that's one thing to watch out for when we're talking about some of these things. But what I find often is if someone has accumulated a good amount of funds, and we're running financial planning calculations, one of the real values they see in that by updating that and talking about it and reviewing it over time is realizing for many folks, wow, they have enough money to do everything they want in retirement for the rest of their life.

0:07:26.7 SO: And a lot of people, even if they have excess, they don't necessarily change their spending habits that much over time. In fact, we know statistically they tend to decrease as you get into your later years outside of medical expenses. So, sometimes they look and say, "Well, there are other people in my family, there are other people who are close to me who I care about, and they could really use some extra funds now to help with life—maybe a home purchase or paying off student loans or any number of things like that—and wouldn't it be nice to help them now and to see them benefit from it now, rather than it passing to them as an inheritance many, many years down the road?" So that's a great area. There is what's called an unlimited marital deduction, CJ. So, if people are married—and this is super romantic—so, I give my wife a piece of jewelry at Christmas and I'll tell her, "Don't worry, honey, don't worry about the tax. This is covered under the unlimited marital deduction," and she just smiles, she's beaming, she thinks it's wonderful. So, it's such a gift in the tax code.

0:08:30.6 SO: But beyond the unlimited marital deduction, one of the things to know about, there are annual gifting limits, so any person can give any other person $16,000 per year in 2022. That goes up by $1,000 next year. So, that's a fairly large amount for people who are pretty wealthy. They're often going to say, "Well, I'd like to even pass on more to kids or grandkids or special people in my life," and between a husband and wife or married spouses, you can each give $16,000. So, you can really extend that. If you're looking at maybe a son or daughter and their spouse, both parents could each give $16,000 to each of those people, up to $64,000 per year. So, it's a way to really stretch that. It's also very important to know that if you are directly paying medical expenses for someone else, that's not subject to the gift tax, thankfully, or most educational expenses. So, that's good to know, and another one that we spend a lot of time talking about, CJ, is the gifts don't have to be in cash. They can be property, and one of the best things to look at is if someone has property, like stocks or mutual fund shares are ideal, they've gone up in value over time, the owner of those securities has an embedded capital gains tax if they've gone up in value.

0:09:48.1 SO: But you could potentially gift those shares to someone else and the capital gains tax rates are 15% or 20%. Many people actually qualify for a 0% long-term capital gains rate if their income isn't as high. So, transferring those shares to someone else and then letting them sell and maybe pay no capital gains tax can really enhance the financial gift. So, there are a lot of different angles to this. I did a webinar recently on the concept around family-limited partnerships and family holding companies. That might be of interest to people if they're in that position of, let's say really thinking about wealth transfer between families.

0:10:28.8 CJ: That's awesome. Lots of suggestions here to take to heart. Do you have any other thoughts for us before we let you go, Scott?

0:10:38.6 SO: Yeah, I guess just as I thought about this leading up to our call, CJ, I think one of the things I came back to time and again is that one of the best gifts I think you can give yourself and your family is financial security and success. It really is the gift that we keep on giving, both in terms of maybe being able to provide further gifts, further support later on, but also not becoming maybe a financial burden. And you and I last month, we talked about a couple things. I mentioned a book I really like, "The Richest Man in Babylon," so something like that, a great book packed with financial wisdom, that could be a great gift. I've gifted some memberships to digital courses, Wondrium. There's some just fantastic financial courses in there. And I've actually had clients who've contacted me and said they wanted to purchase a financial plan for family members. So, I think that type of setting someone up for...

0:11:34.0 CJ: Success.

0:11:36.6 SO: Financial success could really be helpful. And maybe just touch on one other thing. You and I have talked about charitable giving in the past. We're mostly about families here, but there's a lot there. We have past episodes on this, and I recently did a webinar with Dr. Russell James, who's one of the top experts in the country. I'll have that posted on my blog soon around charitable giving strategies.

0:11:56.6 CJ: All right. Oh, Scott, this has been wonderful. Thank you so much. We'll check in again next month and happy holidays to you.

0:12:03.9 SO: Yes. Thank you, CJ. I really appreciate it.