Gifting Money to Our Kids

[athena53]

I see this kind of arguments many times and I don't understand why giving money to children so that they don't have to work or work hard is a problem, if the parents can afford.

Especially on this forum, people talk about retire early, would it be the best if a person retires at the birth, i.e., does not have to work for any day, if the parents have money to support this person to do anything he/she wants?

It's a balancing act. You've seen many posts here from people who retire and then are at loose ends because they genuinely loved what they did and a large part of their self-image and motivation were tied to careers. I think everyone needs as sense of purpose and some of that comes from finding work you enjoy. There's also a benefit to "earning" your own way.

My BIL and SIL are rich. REALLY rich. Their son learned to drive on their twin Mercedes-Benzes, they had a floor-through in a prewar building across the street from the Plaza Athenee in NYC and a magnificent house on a private beach at the NJ shore (Mantoloking). He was the quintessential preppie but somehow was driven to work hard. Undergrad degree in English, went to work for a publishing company, then got an MBA at Georgetown and now works for a bank. I'm sure his parents helped him buy the house in CT and he has no student loans, but they didn't hand him everything, either.

I do think family money would be good for a kid who wants to enter the clergy, be a social worker, or become an expert in Egyptian hieroglyphics, but I'd want them to work at something that gives them a reason for getting out of bed in the morning.

 

[target2019]

Both of my kids got paid university education, because of grades, so we had minor education expenses. One child after working 3 years at a good income, compared to her parents, decided she wanted to become a dentist. So we having happily been paying for that. This means we have spent $300k on one kid and nothing on the other. I always had the idea we would just make that up withthe other child at death, but that could be 30 years. He could be in his late 50s. So, we are thinking about starting to gift him $30k a year. We have 50 times our spend rate, with SS on top of that, so gifting it will not harm us. I'm not concerned that my son will waste it or use it in a harmful manor, he is very frugal with his money, but I am concern about, splitting it with a mate, if/when he gets married and ever got divorced. We providing some Roth funding for our other child's husband and then they got divorced, so a tiny sore spot.
It would be nice if when he decided to buy a house, he had the down payment in hand.
We can just start giving it to him, but, I'd like to hear if there are some better ways to handle this.

We have been funding his Roth account for several years, and that will continue. so, I guess it's give him $30k and he can fund the Roth from that and invest the rest in a taxed account.
On the commingling, ya I have a friend although much older, married and they don't commingle funds, on advice from his attorney. Although I wonder if you can commingle some funds and not others. If he got married I would expect a shared checking account and maybe shared Vanguard account, but could he have one Vanguard account that is not commingled and have it treated separate in a divorce? Residing in Florida.

I've read it once, but will review that chapter. All you quoted about the book may be true, but I'm sure not universal. I may even have him read the chapter, probably the whole book! As I said my son is frugal, he recently mulled over purchasing a new chair for his computer for about close to two months before he pulled the trigger, and longer than that before he upgraded his 7 year old computer, he didn't buy a new, just upgraded some parts.

Ya, I can understand that, but we have spent over $300k on the one and she should have a high income once she gets going. The other, having a chemistry degree probably won't have even half of the yearly income.

We have some similarities. And we have some coomon ideas, like keeping things relatively equal among children.

First born is minimalist (like his maternal GM). Really needs no financial support and has a lot saved. I mean "a lot". He may need help with a down payment soon.

Second born likes to shop (like paternal GM). Good job now after serious setback, but does ask for help in several ways.

The educational investment scale is pretty even, so that is where our stories diverge.

Contributing to son's Roth into the future is fine, in my opinion. I would continue that, but not accelerate giving drastically. I can see the benefit of putting "home" money into an account for his future benefit, one that you still control as he ages. You can give joint or sole ownership in the future. I think you need much more time to evaluate everything under consideration. I know that my own perception about children changes quite a bit each year.

 

[sengsational]

You're right, it was not in the law before. It was an expansion as part of the SECURE Act passed around December 2019.

I searched and found a bunch of links were purple, and realized I did actually hear about that tax-free 529 money ($10K) towards student loans. I have a vague recollection about exploring it now, and don't recall why I didn't pursue it. I have "left over" 529 money and still have DD's student loans, so it needs exploration (again).

 

[Sunset]

I see this kind of arguments many times and I don't understand why giving money to children so that they don't have to work or work hard is a problem, if the parents can afford.

Especially on this forum, people talk about retire early, would it be the best if a person retires at the birth, i.e., does not have to work for any day, if the parents have money to support this person to do anything he/she wants?

For many people, without the need to earn a living, they will lay about, doing as little as possible to skate by in life.

My Cousin was like that, to him work was to be avoided.
His parents constantly gave him $$$ and things like cars.

He of course failed his free University courses, drank to excess, would destroy people's property (like a motorcycle) just for fun, and tell the person.
Basically he turned into quite the Ahole jerk.
Never needed to hold a real job.
He died without any friends and the only person who would talk to him was the neighbor that he paid to cook him suppers , as my cousin was too lazy to learn how to cook.

Not everyone is like that, some people given $60->$100K per year would make use of the money and enrich their lives, and do something useful or interesting.

 

[Koolau]

I see this kind of arguments many times and I don't understand why giving money to children so that they don't have to work or work hard is a problem, if the parents can afford.

Especially on this forum, people talk about retire early, would it be the best if a person retires at the birth, i.e., does not have to work for any day, if the parents have money to support this person to do anything he/she wants?

Sorry if it seems like we are piling on, flyingaway. I guess we are, but this is something I'm passionate about.

I really hope you've misinterpreted most ER retiree's and ER wannabes' reasons for retiring early. For most of us, we LOVED our w*rk at one time or another. It was typically all the other stuff that eventually drove us "away."

In my case, I was eventually able to "create" my own assignment at Megacorp. I fulfilled that assignment for several years and enjoyed all but the corp. cr*p that always comes with any Megacorp.

When the powers that be decided they no longer needed my particular specialty, they told me to do something I didn't want to do. THAT's when I ERd - because I could.

It wasn't because I didn't want to w*rk. It wasn't because I was lazy or unmotivated or whatever you want to call it. Had my parents given me money, I'd have stayed in that position because I loved it. I left when it was no longer fulfilling AND when I financially was able - but I was able because I made it a priority to be "ready" to go on my terms. I didn't depend on anyone else to make me Financially Independent and would never have called upon my parents to make me Financially Independent.

So sorry if I'm too preachy here. As I said, I'm passionate about FIRE - for the right reasons (all personal to each of us), I'm passionate about helping my kids along (not enabling them to be lazy), I'm passionate about LBYM, I'm passionate about giving my best to my empl*yer as LONG as I'm still there. I hope you can at least see it from my perspective as well as your own as YMMV

 

[Green Papaya]

Great thread! Thanks for giving me some foods for thoughts.

We have 3 kids, all with good potential earnings, 1) a graduating dental school student, 2) a resident MD, and 3) an engineer. I do not have to worry about their long term finances. We paid for all 3 kids' undergrad tuitions, but they borrowed student loans for advanced degrees. DS#1 has a late start since he changed his career after working several years. The money he saved while working is not enough for dental school. Both sons have substantial loan amounts but DS#1 loan is almost doubled that of DS#2. DD#3 is currently earning more than her brothers so she does not need any financial help from us. I have already told both sons that I will help with their loan payments. My plan is to match their minimum loan payment each year as long as they continue to pay until finish. That should keep them from being wasteful with their money, continue to work hard and be responsible for their future.

 

[athena53]

I think college educations are an interesting component of this discussion. My parents put all 5 of us through college. All of us have advanced degrees, respectable certifications, or both and had long, fulfilling careers that left us in very good shape for retirement. There are people who swear that if you pay for your kid's college they won't value it. I think it depends highly on the individual kid.

That may extend to the other areas where we spend money on our kids. If they appreciate it and steward it wisely, it was a good decision. If they waste it or consider it an entitlement, it's time to close the Bank of Mom and Dad.

 

[EastWest Gal]

I am thinking about gifting our only DS equity assets from our after-tax portfolio, which is about 2/3 of our portfolio. I think gifting the actual equities in terms of a transfer from our Schwab account to his makes sense. Does anyone have any experience with the nuts and bolts of how this works?

DS has been slow to launch in terms of full time work and moving out, but is fiscally very conservative, and has about $70K in his various accounts, including a Roth IRA and a Roth 401K through a permanent part time job outside his field. His investments have earned %60 since he started, so he is not afraid of the markets, as I was when I was his age.

He is in a field in which there are more applicants than jobs, but I think he will land something within the year. He simply does not spend money. He is anti-drinking and drugs, and at age 29, I think that is pretty fixed, so no worries there. He has had only one girlfriend in his life, during high school. They drifted apart during college. He drives the car we bought him 12 years ago and keeps up the maintenance. It could last 5-10 years more.

Having been down to $46 in our checking account on our honeymoon due to a math error, I know the experience of financial panic, and it is ugly. I know he will never experience the panic I did in the past. FIRECalc says he will inherit big time, and I want to see him confidently launched before he deals with that, and to learn how to manage investments well on his own.

So, has anyone directly gifted ETFs or index funds? How does that work?

 

[Dash man]

I am thinking about gifting our only DS equity assets from our after-tax portfolio, which is about 2/3 of our portfolio. I think gifting the actual equities in terms of a transfer from our Schwab account to his makes sense. Does anyone have any experience with the nuts and bolts of how this works?

DS has been slow to launch in terms of full time work and moving out, but is fiscally very conservative, and has about $70K in his various accounts, including a Roth IRA and a Roth 401K through a permanent part time job outside his field. His investments have earned %60 since he started, so he is not afraid of the markets, as I was when I was his age.

He is in a field in which there are more applicants than jobs, but I think he will land something within the year. He simply does not spend money. He is anti-drinking and drugs, and at age 29, I think that is pretty fixed, so no worries there. He has had only one girlfriend in his life, during high school. They drifted apart during college. He drives the car we bought him 12 years ago and keeps up the maintenance. It could last 5-10 years more.

Having been down to $46 in our checking account on our honeymoon due to a math error, I know the experience of financial panic, and it is ugly. I know he will never experience the panic I did in the past. FIRECalc says he will inherit big time, and I want to see him confidently launched before he deals with that, and to learn how to manage investments well on his own.

So, has anyone directly gifted ETFs or index funds? How does that work?

If you gift stock to your son you are also transferring the cost basis to him. When he sells the stock he will have to pay tax on the gains.
If you sell the stock and give him cash, you have to pay the capital gains tax on the sale.
You can contact your broker for the mechanics of making the transfer.
Depending on how much you gift, you may have to file a gift tax return if it’s over $15,000 in value. You likely won’t have to pay any tax, but have to file the paperwork.
You can create a trust to pass the stock to him upon your death and under current law, he would get a step up in the cost basis.
Outside a trust you risk the shares being sold before the shares are disbursed and the estate pays capital gains taxes.

 

[Time2]

OP here. It's been 6 months since I started the post, just want to add my son finally go a job in his field of chemistry with all the benefits. It took a year after he graduated, might have been a little quicker without Covid.

He had a job he enjoyed that had lots of socializing, but it's real adult time now. First week 8 to 5, second week 7 to 4, no more 2am video games.

He has a choice of 401k or Roth 401k, his talk is fully funding a Roth 401k,
up to the limit ($18,500) After 3 months the company puts in 5% and will match 1%.
I have one more Tuition check in Dec. for my daughter and then I'll start some funds going to my son.
He even gets health insurance, so he will go off my wife's plan saving us $1500 to $1800 a year.
He told me today he started reading in the Reddit FIRE group. He said he's shooting for 50 as a retirement age. Good luck son.

 

[RetMD21]

Outside a trust you risk the shares being sold before the shares are disbursed and the estate pays capital gains taxes.

Couldn't you make his executor or beneficiary w/o a trust?

 

[Dash man]

Couldn't you make his executor or beneficiary w/o a trust?

You could, but once the broker gets notified of the death, they may liquidate the stocks/funds in the account. This happened to me with my father’s broker at Merrill Lynch. Putting the stocks in a trust reduces the risk of this happening because there is no change of ownership.

 

[RunningBum]

You could, but once the broker gets notified of the death, they may liquidate the stocks/funds in the account. This happened to me with my father’s broker at Merrill Lynch. Putting the stocks in a trust reduces the risk of this happening because there is no change of ownership.

Wow, that can be very costly!

Vanguard will transfer the assets to an account for the beneficiary(-ies).
https://support.vanguard.com/triage/coo/B4660AAC

I just always assumed other brokerages wound do the same. Guess not.

 

[Dash man]

Wow, that can be very costly!

Vanguard will transfer the assets to an account for the beneficiary(-ies).
https://support.vanguard.com/triage/coo/B4660AAC

I just always assumed other brokerages wound do the same. Guess not.

Yes, I wasn’t a happy camper. I have nothing good to say about Merrill Lynch, though I will say this happened a long time ago and before the Bank of America takeover.

 

[EastWest Gal]

Why would a broker liquidate the stock, when it can be inherited with a stepped-up basis? That would be a very bad broker.

My inheritance was mostly stepped up basis stock and mutual funds.

I want my son to an after-tax brokerage account, and to have access to some of the assets earlier, which will make buying a home and replacing his car much easier when the time comes. Not everyone goes into a field where they make $200K/year. He doesn’t want or need that much to have a happy life.

We bought our first home not long after I completed residency and was still paying off school loans. That down payment was difficult and my parents loaned us the money, but demanded too much interest.

Given the long bull market that has nearly doubled our portfolio, DS is eventually going to get that pile anyway. Giving him some in the form of equities means he can sell when he needs the money and pay next to nothing on capital gains, compared to us, when we are making Roth conversions and would have to pay much more in our tax bracket.

I know about the gift limit of $15K per parent.

Our accounts have designated beneficiaries-each other, then him.

 

[ERD50]

You could, but once the broker gets notified of the death, they may liquidate the stocks/funds in the account. This happened to me with my father’s broker at Merrill Lynch. Putting the stocks in a trust reduces the risk of this happening because there is no change of ownership.

Wow, that can be very costly!

Vanguard will transfer the assets to an account for the beneficiary(-ies).
https://support.vanguard.com/triage/coo/B4660AAC

I just always assumed other brokerages wound do the same. Guess not.

This doesn't make sense, why would it be "very costly!"?

Why would a broker liquidate the stock, when it can be inherited with a stepped-up basis? ....

As EastWest Gal says, cost basis is stepped up at death. A trust doesn't change that, a living trust (revocable) becomes irrevocable at death, and ownership changes from the living SSN to the deceased EIN. Cost basis is reset at date-of-death.

It's rather inconsequential if the broker liquidates the stocks - just go back and re-buy if you wanted those exact stocks (but that's unlikely). Though I'm not sure why they would bother - just a "clean slate"? Might make some sense as cash could be considered 'safe/prudent', while the current mix might nor be 'prudent' for the beneficiary?

Is there something else I'm not considering (Dash man or RunningBum)? Can you explain?

-ERD50

 

[RunningBum]

This doesn't make sense, why would it be "very costly!"?



As EastWest Gal says, cost basis is stepped up at death. A trust doesn't change that, a living trust (revocable) becomes irrevocable at death, and ownership changes from the living SSN to the deceased EIN. Cost basis is reset at date-of-death.

It's rather inconsequential if the broker liquidates the stocks - just go back and re-buy if you wanted those exact stocks (but that's unlikely). Though I'm not sure why they would bother - just a "clean slate"? Might make some sense as cash could be considered 'safe/prudent', while the current mix might nor be 'prudent' for the beneficiary?

Is there something else I'm not considering (Dash man or RunningBum)? Can you explain?

-ERD50

I'm taking Dash man's word on this:

Outside a trust you risk the shares being sold before the shares are disbursed and the estate pays capital gains taxes.

If this happened to me I'd certainly remember it unhappily.

 

[Dash man]

I was one of two beneficiaries, but not the Executor. The broker, a VP at Merrill Lynch, took it upon himself to liquidate the assets when he was notified of my father's death. Neither I or the other beneficiary were consulted. He claimed it was policy.

 

[ivinsfan]

I was one of two beneficiaries, but not the Executor. The broker, a VP at Merrill Lynch, took it upon himself to liquidate the assets when he was notified of my father's death. Neither I or the other beneficiary were consulted. He claimed it was policy.

Policy? more likely he got some commission from it.

 

[Dash man]

I wouldn't be surprised. At the time I wasn't as financially literate, and that actually motivated me to become so.

 

[SecondCor521]

I was one of two beneficiaries, but not the Executor. The broker, a VP at Merrill Lynch, took it upon himself to liquidate the assets when he was notified of my father's death. Neither I or the other beneficiary were consulted. He claimed it was policy.

I would doubt the claim and be hopping mad and threatening a lawsuit. Even in death, the broker shouldn't have the authority to trade a client account, for the simple reason that it could create a tax liability that the estate or beneficiaries may not want.

Especially in death, in fact. The death can easily create new circumstances of which the broker probably isn't aware. Maybe the beneficiary of those shares was going to be a charity, and the capital gains taxes were unnecessary. Maybe the marginal tax rates of the beneficiaries is different than the original owner, or the beneficiaries intend to disclaim, or, or, or.

Further, at death the account is subject to the authority of the executor and contents of the will, who and which the broker may not even know, and in any case should wait for.

All I expect any broker to do in case of death is to remove online access and lock down the account waiting contact from the executor or beneficiaries (which is what happened with my Mom's accounts).

Any sale of stock after death but before disbursement might need to be reported to the IRS as being done under the estate EIN. Another reason not to do so - the broker may not have the EIN.

The above is all based on the fact that I don't delegate trading authority to anyone. If someone did (and some do), then it's probably legal. I still don't think it's very ethical even in this scenario.

 

[Dash man]

I would doubt the claim and be hopping mad and threatening a lawsuit. Even in death, the broker shouldn't have the authority to trade a client account, for the simple reason that it could create a tax liability that the estate or beneficiaries may not want.



Especially in death, in fact. The death can easily create new circumstances of which the broker probably isn't aware. Maybe the beneficiary of those shares was going to be a charity, and the capital gains taxes were unnecessary. Maybe the marginal tax rates of the beneficiaries is different than the original owner, or the beneficiaries intend to disclaim, or, or, or.



Further, at death the account is subject to the authority of the executor and contents of the will, who and which the broker may not even know, and in any case should wait for.



All I expect any broker to do in case of death is to remove online access and lock down the account waiting contact from the executor or beneficiaries (which is what happened with my Mom's accounts).



Any sale of stock after death but before disbursement might need to be reported to the IRS as being done under the estate EIN. Another reason not to do so - the broker may not have the EIN.



The above is all based on the fact that I don't delegate trading authority to anyone. If someone did (and some do), then it's probably legal. I still don't think it's very ethical even in this scenario.

This all happened 22 years ago. I don’t know if my dad had him manage the account or not. We were plenty mad, not just because of the capital gains taxes the estate paid, but if you remember what the market was doing in 1999, we didn’t gain from that because it was sitting in cash. My father passed in Jan 1999, and we didn’t get any of the funds until October that year. It was a bad experience, but I live on the other side of the country and had no control.

 

[ERD50]

I'm taking Dash man's word on this:

Quote:
Outside a trust you risk the shares being sold before the shares are disbursed and the estate pays capital gains taxes.

If this happened to me I'd certainly remember it unhappily.

This all happened 22 years ago. I don’t know if my dad had him manage the account or not. We were plenty mad, not just because of the capital gains taxes the estate paid, but if you remember what the market was doing in 1999, we didn’t gain from that because it was sitting in cash. My father passed in Jan 1999, and we didn’t get any of the funds until October that year. It was a bad experience, but I live on the other side of the country and had no control.

I can understand that the broker might have sold everything and put it in cash.

But the capital gains issue is what is making no sense to me. The cost basis of those stocks would have been adjusted to the date of death. So being sold after the owner's death would incur no cap gains (or a little if they rose between D-O-D and sale).

I really, really don't think that the cost basis depends on the beneficiary getting a hold of those stocks and then selling them, any action taken after would be at the stepped-up cost basis.

Maybe whoever did the taxes did not know this (or I'm wrong, but I don't think so)? Back in that time, cost basis was self-reported. If this is a big dollar amount, can you file an amendment after 21 years?

-ERD50

 

[SecondCor521]

I can understand that the broker might have sold everything and put it in cash.

But the capital gains issue is what is making no sense to me. The cost basis of those stocks would have been adjusted to the date of death. So being sold after the owner's death would incur no cap gains (or a little if they rose between D-O-D and sale).

I really, really don't think that the cost basis depends on the beneficiary getting a hold of those stocks and then selling them, any action taken after would be at the stepped-up cost basis.

Maybe whoever did the taxes did not know this (or I'm wrong, but I don't think so)? Back in that time, cost basis was self-reported. If this is a big dollar amount, can you file an amendment after 21 years?

-ERD50

I *think* basis step-up was the law 21 years ago, but I really don't know.

My understanding of the tax situation matches yours.

However, I do know that it is not possible to file an amendment after 21 years. You can only go back about 3 tax years.

 

[RetMD21]

I know what Vanguard does (split account w/o selling) and this is the same policy at MIL's brokerage. I am not sure how having a trust would matter. Selling is crazy.