Category Archives: Family Planning

Financial Guidance for the Younger Generation

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Modeling positive financial behaviors for the younger generation especially in affluent communities can pose unique challenges. Here are some key topics I’d like you to consider:

1.    Understanding the concept of “enough”: In affluent communities, where material possessions are abundant, it’s essential to teach the young (and not so young!) that wealth is not solely defined by possessions.  I like to keep my focus on President Roosevelt’s quote “Comparison is the thief of joy” and encourage a focus on spending that has lasting satisfaction rather than buying the next ‘in thing’. Usually, this includes understanding the role that money plays in their lives and how they wish to integrate financial security, spending, saving, and investing.

2.    Value of Budgeting and Understanding their Spending: Teaching younger generations to follow and understand their income and expenses is crucial for financial independence and achieving life goals like homeownership and retirement. Helping them understand their spending patterns provides opportunities for money conversations and creates comfort around money conversations. The goal is to encourage them (however slowly) to plan their spending and create sustainable financial habits that will last them a lifetime.

3.   Understanding the value of employment: Encouraging loved ones to recognize the value of a job or career is part of growing up. We all know that employment provides value beyond earning money since it can add unique opportunities. It will also provide them with a steady source of income, so they have money to eat out, do fun things with friends, and hopefully also begin saving.

Financial literacy for the younger generation is challenging since so much of their world is imbued by marketing. The challenge is how to model or engage with them not to crave what others seem to have but rather to understand what brings them long term satisfaction.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

“Thought Starters” for 2024

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I hope these “thought starters” will help close 2023 and make the most of 2024:

  1. Acknowledge What Went Wrong and Move Towards your future: What’s done is done and we can’t go back and change it, so recognize the errors and the changes that need to be made. This is our challenge and our opportunity for 2024.
  2. Be kind to yourself: Celebrate your Progress! Acknowledge how far you’ve come and “keep your eyes on the prize” despite any 2023 setbacks (job loss, death, overspending, disability, divorce, market declines, missed goals, procrastination etc.).
  3. Measure What Matters: As Theodore Roosevelt said, “Comparison is the thief of joy.” Understand what matters to you and measure your progress towards achieving your goals.
  4. Focus on What You Control: We can’t control other people, politics, the stock market, or social media but we can control what we think and what we do each day. Ever check an email or text only to look up 20 minutes later and find yourself scrolling on your phone, not knowing how you got there?!
    It is up to us to put in place ways to control our behavior and to hold ourselves accountable to our goals and values. This is particularly important when headlines fill you with fear. Don’t waste your valuable time on what you can’t influence or control.
  5. Protect Your Wealth: Implement ways to protect your assets, life, health, income, personal information, family, and confidential data so that when a crisis occurs you can meet expenses and make the most of new challenges. We protect our wealth using insurance, updated legal documents, sufficient emergency savings, updated organized finances, and updated resources (lines of credit and portfolio). We work together to keep moving you towards your financial goals through life’s challenges.
  6. Tax Allocation: Planning your taxes is essential to helping you to keep more of what you’ve earned. To make the most of opportunities we must work together to understand your base tax profile and adjust it through the year so that we can execute on available tax strategies by year-end. During high-earning years we often prioritize tax savings while keeping our eyes on the big picture that may indicate recognizing higher taxes to gain a future advantage.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Key Points of a Divorce that Everyone should know

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It is our goal to provide each client with education and empower them to integrate finances into their lives so that they can support their wishes now and for the future. We should all know the financial impact behind our decisions before making our choices. Couples can find that finances along with shared future goals can empower and strengthen their relationship but at times, future goals are no longer aligned, and couples choose to go their separate ways.

A divorce is a legal process to address the separation of two lives in an orderly and legal manner and allow each adult to move forward in their new lives. In California, it doesn’t matter if this is a traditional marriage or a domestic partnership nor does it matter if it is with same or opposite sex partners.

Over the years I’ve attended many divorce financial planning events and, last weekend one that was particularly good, so I thought I’d share what these professionals said about the next most important step after deciding to divorce.1

My goal below is to educate everyone and is not intended only for those considering a divorce.

What needs to happen to obtain a divorce?

A divorce is granted either by an agreement generated by a judge or one generated by negotiation— or usually both. A divorce judgment is a legal document that declares that the marriage (or domestic partnership) is dissolved and typically includes an agreement on income, debt, assets, and parenting responsibilities. To receive a divorce judgment requires that a petition be filed, a declaration of disclosure, and then wait 6 months plus a day. [Keep in mind that the professionals, at this event1, were all talking about California which is a “no-fault state.” In California it doesn’t matter who serves the divorce petition but in other states the process can be significantly different.]

In the divorce process there is a great deal of paperwork particularly around finances and parenting that is easier to assemble if you have a non-adversarial approach. For finances there is a requirement to file Declarations of Disclosure (initial & final) which includes income & expenses, assets & liabilities (emphasis on all assets), and income tax returns.

How can you go about obtaining a divorce?

  • DIY – Do It Yourself divorce. This process has the fewest fees and couples retain most of the control, but it does require agreement on the process and terms. Together you must cover the legal, financial, and emotional conversations in a respectful and non-threatening manner.
    We recommend that, at minimum, you have an attorney review your agreement before submitting it to the court. The costs will be limited to a filing fee and payment for the attorney and any other professional(s).
  • Traditional divorce, where the decision is ultimately made by a judge, takes control out of your hands. Instead, the judge will apply the law to determine your rights, responsibilities, and entitlements in what is an adversarial platform. This process is the most familiar, most expensive, and often most aggravating. The courts are swamped with cases, so this approach takes the longest to complete. The judge, moreover, doesn’t know you and will, nevertheless, pass judgments that will be binding. The law defines your rights, and the court can compel a party to adhere to the terms regardless of fairness.
  • Mediation is the polar opposite of the traditional divorce. It is a facilitated process to help the divorcing individuals come to an agreement using neutral professionals. In this process it is important to hire a mediator who knows family law and is not adversarial in nature. This private and voluntary process will require conversations and thinking outside the box so as to deliver an outcome that is acceptable to both. The intent is for an agreement that will last, take shorter time and be less expensive than traditional divorce, BUT equally binding. We find this process requires compromise and a willingness to reach a settlement. The challenges for this type of divorce are that each person MUST be able to remain civil and even friendly during mediation since both will need to compromise. This process is, therefore, not appropriate when there is a coercive, substance abusing or violent relationship. Unlike the traditional process you can’t force anyone to keep to their process or make decisions but once an agreement is signed and approved by the court then it is enforceable.
  • Collaborative process. Collaborative divorce is similar to mediation but is structured so that decisions are made together with a team of legal, financial, and mental health professionals on both sides that follow the same ‘collaborative’ approach. The goal of this process goes beyond the agreement and is particularly important for those who have children or will need to interact with each other for a period of time after the divorce (such as for co-parenting tasks that can last the life of the children). The process often results in private confidential and controlled agreements, but it can be very expensive since all the professionals concerned must be experienced and trained in the collaborative process, which is not the usual adversarial legal system. Although it can be the most expensive, the process may yield a more workable outcome. Like mediation, a collaborative divorce doesn’t work for anyone experiencing violence, coercion, or substance abuse.

Divorce is a dramatic change and is often accompanied by conflicting emotions of grief, anger, fear, and anxiety. It is therefore very difficult to make complex decisions during these emotionally intense periods. We have to acknowledge that humans are wired to perceive and respond to danger/fear with an automatic survival response which is the opposite of calm thoughtful thinking. The goal is to generate a calm and thoughtful environment. It is, therefore, particularly important to ensure that the behaviors, words, and actions be those you would find acceptable in the long-term, particularly in front of children. If children are involved, you must also follow Standard Family Law Restraining Orders.

What is AIKAPA’s Role?

We are not divorce professionals. Our role is to provide each of our clients with support regarding their finances by generating needed documents and answering specific questions. For some, this can be done by giving us permission to discuss your finances with your divorce professionals and for others it is done by answering questions posed by each client in individual or in joint conversations. When requested, we also create new financial plans for each client so that they can visualize their finances in the future. In Domestic Partnership dissolution we must also consider federal and state rules that will allow for the same outcome as is experienced for those in traditional marriages.

As a fiduciary, AIKAPA, must respond to both parties openly and completely.

We will not execute financial transactions without approval from both clients once we are aware that you’ve decided to divorce. We work to provide the necessary supporting financial materials in a balanced, sensitive, and factual manner.

Since we understand that a financial agreement in a divorce is a very personal and emotional document, we do not participate in creating the agreement with our clients. We encourage our clients to work together and ask us questions or hire individual divorce professionals to ensure that your agreement represents your wishes today and in the future.

Once there is a joint agreement and a court divorce judgment, we are tasked to ensure that the family portfolio assets are split as indicated in the agreement/court decision.

AIKAPA is here to support the family in each financial decision, but the choices and preferred actions rest with the family.

1Much of the content for this article was from a presentation by Collaborative Practices California – Collaborative Divorce North Bay. If you request it, we can share notes with you or you can join one of their Saturday morning webinars on this topic.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Family Loans

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Lending money to family is often intended to be a gift of love and to provide assistance, but it is also rife with perils, for both the lender and the borrower.  It goes without saying that lending money should only be considered when permitted by your financial plan. In other words, don’t give money away at the expense of your future cash flow.

If all goes well, the loan will be repaid in a timely manner and will be a win-win for the lender and the borrower. In our experience, this is not usually the case.

In fact, most family loans are forgiven and often turn into gifts. In some cases, family discord and financial stress derail the family relationship when the borrower is unable to repay, and the lender needs the funds for their financial well-being. At other times the loan repayment is not the issue, but other squabbles (like unequal lending to family members) arise which can cause defaults and family resentments.

Lending money to a family member in exchange for a promissory note must follow IRS rules. The IRS requirements are clear, the loan must charge a minimum interest rate, must document transactions, and require repayments. If it is instead a gift (no repayment expected), then it must be stated as such and recorded for gift tax purposes (and may require filing an IRS Gift Tax Form).

The recent highly publicized case of Bank of America independent director David Yost’s daughter’s divorce is an appropriate example. Yost appears to have made $8M in loans to the couple years earlier and on divorce demanded repayment from his soon to be ex-son-in-law. The ex- claimed they were not loans but gifts that Yost made to appear as loans to evade taxes. This landed both families in court with suits on both sides and the IRS watching from the sideline.

It is common for highly affluent families to make private loans with assets they do not need in their retirement. It is particularly beneficial when loans are used to purchase assets for the next generation without tax liability and to simultaneously reduce the size of the lender’s estate while avoiding future estate taxes (currently, this estate tax reduction strategy is relevant for families with estates greater than $12M).

My concern over family loans arise when the financial plan doesn’t comfortably cover the loan and yet the lender feels emotionally inclined to make the loan despite the projected shortfall in future cash flow. I find that lenders who are family members do not recognize that despite best intentions the possibility exists that the money will not be repaid, and money not market invested is missing out on gain that will be needed later in retirement. In addition, most are not aware that without proper documentation the IRS can label this transaction as a tax avoidance technique.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Student Government Loan Repayments to Restart in May

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The Department of Education has announced that it will restart student loan payments that were frozen at the start of the pandemic. This was intended to allow for increased cash flow and savings during the pandemic. So far, it does NOT appear that the government will create new student loan forgiveness programs. If you were able to save over the last two years, then let’s review if paying down your student loans is the best use of your additional savings.

Action for those with a federal government student loan:

  1. Review the terms and balance of your loan.
  2. Make sure that you understand if it falls under any of the existing (and not yet honored) forgiveness programs.
  3. Log on and update your contact information.
  4. Determine your new payment amount and if you can consider paying it earlier. We recommend that you start paying it sooner than May if your cash flow allows so that you lower the loan before May, but this may not be ideal for all.Let us know and we can go over your specific situation.
  5. If the loan repayment amount doesn’t work within your current budget, then let’s work on a different solution before the May due date.
  6. Don’t count on blanket loan forgiveness – although it may arrive, it is not likely – the current government goal appears to be focused on fulfilling existing forgiveness programs not creating new ones.
  7. Check with us BEFORE you accept loan forgiveness offers – they may not be legit – anyone offering that they can easily forgive your student loan without details should be suspect.

Finally, when working online to obtain information on your student loans (or other financial transactions) please err on the side of caution and check with us and your CPA to ensure that you avoid scammers. They get more sophisticated each day.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Gamification of Trading

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The suicide of a 20-year-old experimenting with trading on the Robinhood platform
has many calling for new regulations on trading. I think new regulations on the “Robo”
interfaces are required but not on trading. Robo platforms, like Robinhood, provide a
software interface that makes trading more like a game.

Brokerage firms have been on a serious race to engage directly with the young and the
inexperienced. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive
Brokers, Fidelity, Merrill Lynch, and many others have all embraced commission-free
and zero-minimum balance trading on platforms that focus only on the upside
of trading. These platforms are more reminiscent of an animated game than a
serious financial transaction. Even those who have managed to make a little money on
day trading often fail to understand that there are tax consequences. They usually
reach out for assistance when they receive from these brokerage firms an unexpected
1099 with a large tax liability.

It is clear that what we need is more clarity on what is a game and what has real life
consequences.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The American Rescue Plan of 2021: Highlights

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The details of the American Rescue Plan 2021 are still being processed BUT we know
that it doesn’t include RMD relief for 2021 nor increased minimum wage. It does
provide both 2020 and 2021 tax filing items. Below, I’ve outlined those that I found
most significant so far.

  1. “Stimulus Checks” For individuals: $1,400 per eligible individual for
    all dependents with stricter phaseout that start at $75K for individuals and at
    $150K for those married filing jointly (MFJ). File early if your 2019 tax filing
    does not qualify you for this stimulus.
  2. Expansion of Child Tax Credit: It provides an increased amount of child
    tax credit for those under $150K (MFJ) AND an increase to $400K (MFJ) in
    earnings for the base credits. In 2021 there should be an opportunity to
    receive more child tax credits for up to $400K.
  3. Extension of Unemployment Compensation: An additional weekly
    $300 Unemployment benefit was added, and coverage was extended until
    September 6th, 2021.
  4. 2020 Tax-free Unemployment Insurance income: For those receiving
    Unemployment Insurance in 2020, up to $10,200 of those earnings will be
    tax-free.
  5. Increased Premium Credit Assistance: Healthcare premium assistance
    extended from 2020 through 2021 with higher earnings.
  6. Tax Credit for Employers to cover COBRA for 3 months: Any
    employee involuntarily laid off will have free full COBRA coverage for 3
    months by the employer who will receive credits for paying their COBRA.
  7. Tax-free student loan forgiveness for the future – if a student loan is
    forgiven by 2025, it will be tax-free.

It will take time to distill what will be relevant for 2021 taxes particularly since we are
all still trying to understand and work through CARES 2020 tax rules and implications
for 2020. For now, it makes sense to slow down the 2020 tax filing and
ensure that your CPA is aware of all of the CARES 2020 and TARP 2021
rules before filing – luckily, we all now have until May 17th.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Preparing Your Family Finances and Our Role

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How do we prepare for the loss of someone who plays a lead role in your family’s financial life? This can be a partner, a spouse, a parent, or even yourself. Aikapa’s role during such a crisis focuses on ensuring that the family will have the available cash flow until the transfer of the estate is completed AND on providing the information that the Estate attorney and CPA require to transition the estate efficiently. Below, I’ve outlined how we can prepare for such a loss.
1. Short-Term Cash Flow: Make certain that emergency accounts have enough cash to support family expenses for 6 months and that the account is available to those left behind. That means that the family has access to the login information and that the account is titled properly (T.O.D., Joint or Trust are the usual titles).
2. Consolidate Financial and Legal Records:  It is useful if the family has access to financial and legal records.
a. We can easily generate financial information needed for accounts that we directly manage.
b. It would be useful for the family to also have original financial records for accounts or finances not under our purview.
c. Similarly, we would benefit from information on former and current employer benefits and contact information.
d. Finally, the estate documents should also be easily available by the family or we should have a copy filed with us for reference.
3. Verify that you have the Appropriate Account Titling:  The accounts that take more effort to transfer are those titled under the individual’s name unless they have a wrapper to make them non-probate assets. We will use a T.O.D. (Transfer On Death) wrapper that bypasses Probate Court if your Estate plan doesn’t indicate otherwise.
a. We can easily adjust the title for those accounts that we directly manage. We regularly review these against your wishes and your Estate plan. 
b. Accounts held at other institutions AND under an individual’s name will need your management and update (check with us if unsure). We will consult with your Estate plan and make recommendations, but it will be up to you to ensure these are implemented. Example of accounts that we find are often missed include checking accounts, savings accounts, employer stock accounts, options, 529 and inherited accounts held at other institutions.
c. Other assets, such as real estate, need to be titled correctly as specified in your Estate plan. We can guide you, but you must implement these yourself.
4. Complete and Update Beneficiary: We sometimes find that although everyone is well intentioned, beneficiary designations are missed. Though we find this most often with employer accounts, we do see it also with other accounts.
a. We can easily review and update beneficiaries on accounts under our management and we do so regularly.
b. Accounts at your employer require that you check and make any needed changes yourself. Ideally you will also keep a copy of your beneficiary selection with your financial records.
c. Your home or other real estate may also need a beneficiary designation, but we follow your Estate plan since different states use different rules.
d. Accounts held at other institutions will also need to be updated with beneficiaries.
5. Availability of All Logins and Passwords. It is essential for the family to have access to login and passwords. This includes your computer, phone and online passwords. If you would prefer not to share this information then let us know WHERE the information is located, and we’ll share the location with family when and if needed.
As you would expect, we each respond in our own way to the death of someone close to us. Some focus on getting things done while others find themselves unable to function. The range of reactions spans the full spectrum of emotions. This is the way it should be and ideally, we strive to let them take the time to grieve without anxiety over finances. If we know all is in order, we can delay most of the initial tasks and allow the family the peace they need to deal with the loss while we create what will be needed by the Estate attorney. Once we know that the family has cash to support spending for 3-6 months, we work on generating a list of assets that are part of the decedent’s estate. We generate this initial information from our records (based on the financial plan and visual asset map). We then work with the family to update this information, but it is only after the family obtains death certificates that we can reach out and obtain exact information on items on this asset list. We need to ensure that we have the correct information on the title, beneficiary on record, total account balance and custodian for each asset. The Estate attorney will be able to begin their work only after they are provided with death certificates, estate documents, and our detailed list of assets. They will create an action plan, outline the process, estimate the costs and provide a potential timeline to settle the estate. The Estate attorney is the one responsible for legal filings and letting us know when the assets are ready for transfer. We are responsible for the actual transfer and settling of accounts. Dependent on the time of the year and with the guidance from the Estate attorney, we may want to delay the involvement of the CPA or bring them on immediately.

Once this process begins, it is imperative that we keep the lines of communication open throughout the process as the Estate settles and assets transition. There are time constraints associated with certain filings and activities related to settling the estate which makes it doubly important to work together. But it all begins with having your documents available, titled correctly, and beneficiaries clearly stated. We will focus on reviewing your estate documents during 2021 meetings.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Cyber-crime, Phishing, Robocalls, and Wanting to do Good

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Almost every day there is an article in the news about financial fraud. Much of it impacts seniors, like the telephone scam now doing the rounds that has fraudsters posing as Social Security representatives. However, we are all at risk, especially if we believe we are too young, too smart and too vigilant to fall for a scam. Sadly, scam artists are very sophisticated, intelligent, and focused so that they’ve become experts at separating people from their money. Only last month, “Shark Tank” magnate, Barbara Corcoran, was tricked out of nearly $400,000 through an email phishing scam in which fraudsters convincingly posed as her assistant.

A lot of financial fraud targets seniors or those in high pressure situations because cognitive agility decreases as we age or when we are stressed. Furthermore, seniors who live alone are particularly vulnerable.

Here are several things you can do to protect yourself and loved ones from financial fraud:

  1. Simplify your financial life. One of the best things you can do to reduce the chances you’ll be taken advantage of is to reduce the number of accounts you have and the number of financial institutions you work with. Fraudsters are experts at catching people off guard, posing as others and making their prying questions sound both reasonable and plausible. Make it a habit not to respond to phone calls regarding finances unless you know the person at the other end and never trust emails involving finances without first verifying the source.
  2. Limit access to and block large transactions. The first step in preventing fraud is to limit the money that can be easily accessed by not keeping large sums in checking accounts. Keep large accounts with a separate institution so that it takes a day or two to make a transfer. Next, if your bank allows it, set alerts for large transactions or block transactions over a certain size. Always use a credit card for online purchases since they give you the ability to reject a charge, while your debit card will automatically pay from your account.
  3. Always use maximum security on email accounts that you use for financial communications. We’ve seen most cyber fraud through yahoo.com and gmail.com accounts prior to the additional security currently available.
  4. For large transfers, particularly during hectic times, involve a trusted financial partner and NEVER accept changes to the receiving account and contact over email (or a call from someone you don’t know). It is better to halt the process entirely or at least confirm with a known financial entity than to change course midstream during a cash transfer. Most of the successful fraudulent transfers have been during escrow for a new house purchase or sale. The methods used are creative and ever improving.
  5. Families should plan their spending ahead and NOT respond to charitable requests on the fly. It is not unusual for seniors to receive many robocalls and mail requests from real charitable organizations because they know that seniors want to do good. It is not unusual for seniors to spend more on charitable donations made ad hoc than was planned. Make a point never to donate based on a phone call or last-minute request at a checkout unless that is part of your charitable plan for the year. I recommend families sit together and come up with an annual plan for charitable donations. When charitable opportunities present themselves defer them for review at your next family charitable giving gathering.
  6. For seniors or those facing high stress situations, you may want a backup notification sent to your spouse, financial caretaker, or a trusted person for high value transfers. If your bank does not provide for such alerts, then make it a standard practice never to make high value transfers without extensive planning and verification.
  7. For seniors, it’s important to have a potential financial surrogate in place long in advance of cognitive decline. Identify a trusted family member or friend or trusted professional to be your financial caretaker and start conversations long before you feel you need to turn over your finances. Consider providing view-only access to a trusted person so that they can help you monitor your account activity and be notified of large transactions and suspicious activity. It is a good idea to involve them with your tax preparation and filings as well.
  8. Due to the number of data breaches in recent years (that have exposed thousands of people’s Social Security numbers and other sensitive data), it has become increasingly possible for fraudsters to open accounts in another person’s name. On a regular basis, personally monitor your credit history with all three major credit agencies for new activity that you didn’t initiate.
  9. I’m personally uncomfortable with ongoing Credit Freezes unless you can monitor and implement them yourself at minimal cost and without involving a third party. Using a credit monitoring service is not recommended since you are involving an unregulated third party and, in any case, will only alert you after you’ve been victimized. The recommended approach when this happens is to freeze your credit at all 3 major credit agencies. Keep in mind that though this is often recommended by cybersecurity experts it can become a major hassle for you. Freezing your credit can be an issue for you if a company needs to legitimately verify a transaction with your credit history (this is the case for some insurance and bank transactions). Unfortunately, freezing your credit is sometimes the only way to prevent attempts to open a new account in your name, and maybe the preferred or only option for seniors.

Financial fraud is rampant. However, with a bit of preparation, a support system, and communication, you can significantly reduce the odds that it happens to you and your love ones.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Business Owners: Hiring family

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One of the most common reasons individuals become business owners is to have more control over their time and financial decisions—to create and be able to drive their own vision in an environment that they choose, and hopefully enjoy.

Those decisions include, among others, what types of solutions the business will offer, how clients will be serviced, which vendors the business will use, and who the business will hire and fire.

Moreover, the IRS’s website states, “One of the advantages of operating your own business is hiring family members.” The IRS is very clear that businesses can and should hire family members. They know that at times family members are the glue that keeps small businesses functioning and often provides owners with the time needed to lead and grow their companies. Small businesses are an essential part of the US economy. The most common family members hired by small companies are spouses since the success of a small business owner is often entwined with the support they receive from their life partner. This is so common that even 401K plans for single-owned businesses include spouses. Though more common, hiring family members can go beyond the spouse and includes anyone that is related, a sibling, a parent AND even a child. [see more details on the IRS perspective on hiring family https://www.irs.gov/businesses/small-businesses-self-employed/family-help].

When hiring family members (either as employees or as 1099 consultants) a business owner must adhere to the same rules as for nonfamily members. From a strictly operational point of view, one clear advantage of hiring family is that a family member can provide support or services that the owner, for whatever reason, is uncomfortable having performed by a nonfamily member. This may be particularly true when the business wishes to keep its financial reports “for family eyes only” or if the business relies on sensitive proprietary information or compliance rules that could be jeopardized by employee turnover. Similarly, a family member can provide cohesion and ensure the retention of corporate knowledge when employees leave the firm – this is invaluable to many small businesses. On the other hand, owners might hire a parent or a child solely to provide them with a taxable income while they engage in work that benefits the business owner’s vision.

The business owner does have the responsibility of deciding on a fair level of compensation for all employees. To avoid potential conflicts within the firm, compensation ought to be similar to that of any regular employee performing the same function. Another more flexible option, is to hire family members as 1099 consultants. Consultants have more flexibility on the tasks they can perform and the compensation they are awarded.

Hiring family can be a straightforward way to reward family members who contribute to the success of the business. Providing spouses, siblings, children and even parents with taxable earnings while serving in roles that provide benefit to the business owner and the running of the business.

For business owners in high tax brackets, hiring family (who are in lower tax brackets) can garner meaningful tax relief. If hiring children, it also provides for “good parenting” opportunities and leadership development. The key to hiring your child is to strictly abide by standards of bona fide age-appropriate work, ensure a reasonable wage, and follow federal and state regulations relating to labor standards. Getting a handle on all of this, can feel overwhelming but it is actually fairly straight forward.

When hiring a minor (family or not) the Fair Labor Standard Act (FLSA) must be followed which has restrictive language on the type of employment for those under the age of 14. FLSA actually states the specific jobs that are permitted which include delivering papers, casual babysitting, or modeling/acting. Starting at age 14 the regulations only limit the amount of time (not the type of job) but also that the work doesn’t expose the minor to dangerous environments such as radioactive areas and working in demolitions (among others).

Hiring family as employees (rather than consultants) is a constant balancing act that requires careful consideration but can deliver financial benefits. It may be prudent, at least initially, to place hired family under the direct supervision of a trusted nonfamily employee that will have full authority over mentoring. This works well for minors but not so well with adults. The potential for unhealthy rivalries and vying for attention amongst siblings and hired staff can sour what is often an exceptional opportunity. Open communication and clear accountability is the key to success when hiring family as employees. Everyone involved must have a clear picture of where they stand, eliminating time wasted on misunderstandings and second guessing one another’s motives and intentions.

The process is a bit easier and the rules a bit more advantageous if family members have their own business (1099 reporting business) and are hired as consultants to support the business owner. In addition, as a 1099 consultant, they have the flexibility to also work outside the family business. Often their total earnings will be taxable at much lower tax brackets than they would be if it was earned by the higher earning business owner. They will also qualify for tax-deferral and social security on their net business earnings.

We encourage you to consider hiring family members particularly if you are a business owner with high earnings and high tax liability. We strongly recommend hiring family members when we discover that family already provide unpaid assistance to the business owner and are in need of financial support or need to increase their social security income.
Let us know if you are considering including a family member (parents, spouse or children are the most common) in your business. We’ll provide a summary of the benefits to you, your family and your specific business.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com