Balancing an advance on kids' inheritance

[BigNick]

DS has a decent job and is living with his GF who makes twice as much, and they are content to rent for now. DD also has a good job, but she wanted to buy a house in an expensive area, so we gave her $200k as a big down payment for that and later about $30k to become a partner in her BF's new business.

We made sure that both kids know that these are advances on the inheritance, so if the plane taking us on vacation crashes tomorrow, DD owes DS half of what she has had as an advance on the inheritance (i.e., $115k). They will both be getting a big chunk of cash, though, so that should be no problem.

However, to protect DS a bit further, especially in case either kid's family/marital situation evolves, we took one of DW's life policies and changed it so that DS became the beneficiary instead of me. This pays out about $200k, so when the poop hits the A/C, DD will only have had $30k more and will only own DS $15k. (To put this in perspective, if they inherit less than $500k each from us, a number of things will have had to have gone very badly wrong.)

We have decided to keep all of this out of our wills, as we trust the kids and they trust each other. So they will inherit 50–50 and sort it out. We are lucky that they are both solvent, even if neither is as financially literate as I might like.

However, I'm not sure what to do about inflation. DW's life policy is 50% in stocks, so in a few years time its value may have caught up with what we gave DD, although that's not guaranteed. I'm slightly concerned that when the time comes, the adjustment may leave one kid unfairly (dis)advantaged.

There is also the matter of exchange rates, as DD and DS live and work in places which use different currencies. DD got her money in what I'll call Blargs and DS will get his in Blorps, and the Blarg/Blorp rate will of course fluctuate over time.

But perhaps I'm overthinking this, as none of the parties involves seems to want to discuss it and so maybe doing it all on nominal values in Blargs is simplest...

 

[DrRoy]

I have seen where currently agreeable situations can change over time, or change when someone has died. I suggest that you update your will with your wishes so that things go the way that you want for sure.

 

[Stormy Kromer]

I think it is good that you can help your children while you are alive and they can use it wisely to improve their lives. I have done the same on a much smaller scale.

From my observation giving cash to one child and a promise to another has a lot of potential for problems in the future. I'll give you an example. DD had two sons, me and DB. We both wanted to take over his farm. Dad chose DB because he was older (and couldn't hold another job). He gave him the whole works and gave me a promise that his will would even things out. 30 years later when he passed there were no assets left in his estate to even things out. Fortunately I saw this coming and never relied on a potential inheritance and FIRE'd at 50 on my own.

No hard feelings.

I made up my mind that if I ever help one child, the other gets the same amount at the same time.

 

[Souschef]

My one son requested an advance on his inheritance to by a house. When I told him I would give him $250 K, he broke down and had to collect his emotions.
I adjusted the beneficiary distributions to reflect that amount, My other son will inherit $250 K more than him.

 

[PatrickA5]

I try to make gifts equal to my 3 kids at the time of the gifts.

For example, we're helping both DS and DD1 with house purchase closing costs and some minor repairs. It'll probably be around $20K each. I've already informed DD2 that we are helping her siblings and to expect a check to balance things out once the expenses are finalized. No way would I want to try and even things out later in the future.

As Stormy mentioned above, both DW and I got the short end of the stick when our parents gifted money to our siblings, but didn't to us - because we didn't "need" it. Even though we always told our parents that "we don't mind" - the fact of the matter is we DID mind. There were hard feelings (minor) every time FIL bought SIL a new car or every time my dad gave my brother money. Both sets of parents had plenty of money to make equal gifts, but chose not to. We both felt we were being penalized for being responsible with our money.

 

[Car-Guy]

An unintended consequence of gifting too much, too soon and for too long, can create the potential for a less than motivated kid.

 

[OldShooter]

I have seen where currently agreeable situations can change over time, or change when someone has died. I suggest that you update your will with your wishes so that things go the way that you want for sure.

+1

 

[street]

Very interesting thread and the different views on how to handle advances/gifting scenarios.

In my case we only have one son, so it does make it simpler in many respects. We have gifted him one large amount for a home, and we only did that because of the circumstance at the time. He had a new home and was getting married, and that home didn't fit the needs for them once they got married.

Other than that, he knows he has to get it done on his nickel. He bought a large shop some years back and we loaned him the money and he is repaying us yearly. I am one that doesn't like to gift or just hand out money to kids. They need to work it out and find the way on their own. I will say that I would be there as a safety net only if circumstances arrive that it would a must to help them.

He knows that everything will be his at the end. I do believe it makes for a healthy trouble-free life for them knowing that handouts aren't going to happen.

Yes, IMO with two kids I would have it in a will and make sure at the time to give each the same. I think even with level minded kids that can come between them and not be a health relationship in future years. I have seen that a few times and not a good turnout for anyone.

 

[BigNick]

I made up my mind that if I ever help one child, the other gets the same amount at the same time.

This was our thought initially. But DS really didn't (still doesn't) need $200k, and the capital gains tax hit just to balance things out would have felt like a high price for "evenness".

An unintended consequence of gifting too much, too soon and for too long, can create the potential for a less than motivated kid.

Agreed. In our case, DD and her BF have the same-sized mortgage as they would have done anyway; they just have a nicer house. And of the money that I gave DD to put into BF's business, she still holds 40% of it for a rainy day. She has the business acumen that runs in my side of the family but which bypassed me entirely.

 

[Music Lover]

I don't have kids, my wife has just one so the math is pretty easy. Her kid get all of her money if she dies (I don't need it), and my wife gets mine if I die before her.

Both our parents had 3 kids and both parents when giving money gave equally to all 3 even though some of them many not have needed it at the time instead of making them wait until they died for their share. But as all 4 of our parents have said: "Why punish success?"

 

[SecondCor521]

This was our thought initially. But DS really didn't (still doesn't) need $200k, and the capital gains tax hit just to balance things out would have felt like a high price for "evenness".

Not sure if this is a possibility, but if you do a $200K "in kind" transfer of investment assets to them, you can defer the capital gain.

If the FMV on the date of transfer is higher than your cost basis, then they would use your purchase date and purchase price as their basis. (If not, the rules are a little weird.)

You'd still probably have to file a gift tax return and deduct the excess from your lifetime exemption, but the CG could be deferred indefinitely.

You can talk with your brokerage firm about an ACATS transfer. That's what I do with my kids.

 

[Stormy Kromer]

This was our thought initially. But DS really didn't (still doesn't) need $200k.

This is a dangerous assumption.

 

[HarveyS]

I would agree with the idea of "give the same amount to each, at the same time". Otherwise, inflation will erode the value the second to receive actually receives. I also recognize the cost of taxation that would arise just to even things out today. But, in essence, would you not just be paying tax today instead of at time of death?

May I suggest you take the $230k and gross it up for whatever tax you had to pay to give DD the money (the $230k cost the estate much more than that). Then, create a new investment account with that value. Speak to DS and agree to fund the new account with investments you already own which suit him and his risk tolerance. This might take some compromise. Then, make DS the sole beneficiary of that account. Sit down with DS and DD and explain to both of them. Finally, update your will to reflect your wishes and this discussion. (that is, for example, everything is split 50/50, with the exception of account XXX which goes to DS per the discussion on mm/dd/yyyy.

 

[marko]

As we've discussed several times here, gifting money and dealing with inheritances is a minefield. Best to get as many contingencies considered and written down as possible.

 

[ivinsfan]

In regards to the OP I don't see anyone commenting on the fact they gave DD to buy a home ie, invest in real estate. What ramifications does that have on this decision?


Parents die, the home DD bought may have gone up tremendously in value and the 200K given to enter that market is now much more then 200K.


I'm just putting this comment out there to people who say everything should be even between the kids, what are your thoughts on this? In my mind HarveyS is going in the right direction.

 

[ivinsfan]

This was our thought initially. But DS really didn't (still doesn't) need $200k, and the capital gains tax hit just to balance things out would have felt like a high price for "evenness".



Agreed. In our case, DD and her BF have the same-sized mortgage as they would have done anyway; they just have a nicer house. And of the money that I gave DD to put into BF's business, she still holds 40% of it for a rainy day. She has the business acumen that runs in my side of the family but which bypassed me entirely.

Well OK then you let her enter into a nicer home..see this is tricky because it wasn't your money or no home, it was your money and a nicer home. And that's absolutely your call. But you say your DS doesn't NEED 200K yet your DD didn't NEED it either.

 

[iloveyoga]

I really like the approach of doing the same amount at the same time, even when the situation is not the same between kids. It is not fair that the one that "doesn't need it" doesn't get similar treatment, ask me how I know that. And it can cause hard feelings. I have tried to be as fair and equal as possible with our kids, who have very different situations.

 

[iloveyoga]

I have wondered too, are there tax consequences if you inherit money and then "give" part of it to a sibling as described above?

 

[pacergal]

It can be a slippery slope, but each family has to decide what is the best for them.
Our two kids will get 50/50, not planning on changing our wills or beneficiaries.

As for gifts now, each kid receives what we feel they need, and can use, at the time of need.
And we do a smaller gift, the same to each, at Christmas.

Son has had help with payoff of school loans, legal expenses during very messy protracted divorce, and living expenses prior to employment.
Daughter has had down payment for house, wedding expenses, medical expenses after unexpected medical issue.
It is funny, when my husband and I sat down one day to recollect and itemize, it really was about equal in cost to each child!

We feel so blessed that we have the ability to do this. Never in a million years did we think we would be able too while working.

 

[brett]

Our daughter and husband have had $400K. They have 4 children each of whom get $100K each off the top of our estate for edu fund. They each have an edu account that also we fund each year. We will do the same if our son/spouse ever have children.

Our son has had nothing. He and his spouse may, at some point, if they buy a home.

We update our respective wills every five years or so and use the opportunity to make adjustments to account for the discrepancy.

It is not a big issue for us. My sister got a fair bit of money directly from our parents during their lifetime. She needed it.

This certainly did not cause a second of discord between us or between me and my parents. Nor did it enter either of our minds when we divided the estate evenly after their passing.

IMHO, it is not always about giving the exact same amount to each child. We are not looking to split the atom.

 

[PatrickA5]

In regards to the OP I don't see anyone commenting on the fact they gave DD to buy a home ie, invest in real estate. What ramifications does that have on this decision?


Parents die, the home DD bought may have gone up tremendously in value and the 200K given to enter that market is now much more then 200K.


I'm just putting this comment out there to people who say everything should be even between the kids, what are your thoughts on this? In my mind HarveyS is going in the right direction.

Even though we keep things even on an annual basis, I don't think I care to worry about what they invest (or spend) it on. If one gets 20K and puts as a down payment on a house that goes up, well... then good for them. If the other kids blow the money...such is life. I can't control possible gains/losses after the fact. But, having said that, I see your point in that the kid that didn't get the 200K could be way behind many years later.

FIL gave SIL money monthly over 20 years - because she was poor (she was). We made it even after his death, but didn't try to take into account inflation. I guess we could have, but SIL wouldn't have understood and would have been mad.

 

[SecondCor521]

I have wondered too, are there tax consequences if you inherit money and then "give" part of it to a sibling as described above?

Depends on how it's done and how much people know about the tax laws.

If one inherits money and then gives part of it to a sibling, then that gift is subject to gift tax rules. See https://www.irs.gov/businesses/smal...oyed/frequently-asked-questions-on-gift-taxes.

If one is pending an inheritance and chooses to disclaim, it's possible that the disclaimed amount might go to the sibling. There are rules here too. But in this case there would be no gift tax because it was never your property to give away in the first place, it was just about to be yours.

 

[BigNick]

Not sure if this is a possibility, but if you do a $200K "in kind" transfer of investment assets to them, you can defer the capital gain.

If the FMV on the date of transfer is higher than your cost basis, then they would use your purchase date and purchase price as their basis. (If not, the rules are a little weird.)

You'd still probably have to file a gift tax return and deduct the excess from your lifetime exemption, but the CG could be deferred indefinitely.

You can talk with your brokerage firm about an ACATS transfer. That's what I do with my kids.

Thanks for the suggestions, but this is probably not going to fly with us being in Spain, DS in France, and DD in the UK.

(Incidentally, Spain has a very logical, but tough, gift/inheritance tax regime. If you give money to your kids and they live in Spain — not the case for us — it is taxed at exactly the same rate as the equivalent inheritance. In other words, for a Spanish person, giving money to their kids now to try and save inheritance tax doesn't work. Most countries have rules that say if the gift is made 5 or 10 years before death it doesn't count, but here, the tax is payable immediately and the lifetime exemption is zero.)

 

[Alan]

We are gifting equally to both children and while they were in different countries we didn’t attempt to adjust for exchange rates, simply donated the same amount to both in USD.

 

[Time2]

My one son requested an advance on his inheritance to by a house. When I told him I would give him $250 K, he broke down and had to collect his emotions.
I adjusted the beneficiary distributions to reflect that amount, My other son will inherit $250 K more than him.

We paid $300k to get my daughter through Dental School, this looks to be the year we play catch up with our son. He is seriously looking at homes and we expect to pay for it one way or another.