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Short Version:

If one is doing well - but by no means wealthy - what is the best strategy for watching out for relatives who are less well off?

Long Version:

My wife and I are in our early 30s, and we have our finances under control: we have a healthy emergency fund, solid employer matches on both of our 401k plans, and after our expenses we still have funds left over for some additional investments.

One of our siblings is not doing as well. He graduated during the Great Recession, and like many he has been under-employed ever since. His parents are supportive, helping him to re-train into a more lucrative field, but we are concerned that the delay in getting on his feet is going to have long-term financial implications.

We are considering opening a S&P 500 Index fund earmarked for his use. We would put a few hundred dollars a month into this fund, and then if he has a major medical problem, is struggling to make the down payment on a home, or is approaching retirement age without sufficient funds we would provide assistance.

Questions:

  • Is there a better vehicle for this than an index fund?
  • Are significant downsides to keeping the money in our name until he needs it?
  • Are there any other considerations that we are overlooking?
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Is there a better vehicle for this than an index fund?

Seems like a good choice to me, unless you want to protect it from market risk since it's in essence an emergency fund, in which case maybe you'd want to keep some of it in CD's.

Are significant downsides to keeping the money in our name until he needs it?

The main downside would be if you had need to dole out more than the maximum annual gift exclusion amount in a single year (currently $14,000), you'd have to report it as a taxable gift on your tax return and it'd count toward your lifetime gift exclusion. You and your wife can each give a gift, and if your brother were married you and your wife could each give to both he and his spouse, so 2-4x the annual gift limit before this becomes an issue. Additionally you can pay medical/education expenses directly and that is not counted toward the annual exclusion.

Are there any other considerations that we are overlooking?

There's always a risk that gift-giving can create expectation and/or resentment. I'd think you'd want to make instances of giving not sound like something you planned for, but something you are sacrificing for. Not sure what the best strategy is there, every family is different when it comes to dealing with finances.

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significant moral hazard is something to consider.

If you want to help someone, give them a gift, make sure everyone knows that it is a gift with no strings attached, and move on. That's charity and it's a great thing. If a medical emergency pops up and he's poor the government already provides the safety net we're all paying for.

of course setting something like you suggest up creates expectations. That's why welfare programs are universally detrimental to the individual. "Why work when someone else is going to give me money every month?" That's basic human nature.

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    OP is in the US. What makes you think a poor person gets free medical care? – JoeTaxpayer Sep 23 '17 at 13:22
  • @JoeTaxpayer Medicaid eligibility is typically income based. – Eric Sep 23 '17 at 22:12
  • +1 for the moral hazard. Creating expectations is why wealthy people set up charitable foundations. The check is cut by the foundation, not the individual, so the personal expectation is limited somewhat. – pojo-guy Sep 24 '17 at 3:32
  • In general I am not concerned about moral hazard. He wants to contribute -that's not the issue. I also don't plan to tell him about the fund to spare his pride. – codeMonkey Sep 24 '17 at 12:24
  • @Eric - yes, I know. The bar is remarkably high to qualify (i.e. A very low income). This answers makes an assumption that's not justified in the question. – JoeTaxpayer Sep 24 '17 at 12:27

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