How do I protect money gifted to kids if they divorce?

[Joylush]

Quote:

Originally Posted by Time2 We got burned when we funded a SIL's IRA contributions and my daughter divorced him. It wasn't a lot, but it left a sour taste. I want to even things up with my son as we have paid for my daughter to go to Dental school, $270k to $290k before she is done. He's still single, I'm comfortable he won't spend it, he is working, investing and funding Roth's, so doing well already. Is there a way to protect any money we gift him from a spouse if he should divorce? Would it be best to get a prenuptial for any money going into the marriage? What about protecting gifted money after the marriage.

I don’t blame you one bit. Best you can do short of establishing a trust is to educate him. Typically money that is never commingled is not considered marital assets. Make sure he always keeps it separate from future marital funds. It should stay protected that way.

Premarital Property
The property that a person brought into the marriage is usually off-limits to the other spouse. However, this can change if the old property has comingled with marital property. For example, a bank account can become comingled property if the other spouse was added to the account or funds were used from the account that make transactions indistinguishable between separate transactions and marital transactions.

Additionally, premarital property that increased in value due to the contributions of the other spouse may provide the basis for an award to the other spouse. States vary on how they treat this issue.

Gifts and Inheritances
Most states recognize that property that is acquired by an individual as a personal gift or inheritance is separate property not subject to division. However, most state laws mandate that the spouse who wants to treat property as separate property has the burden of proof of proving such. For example, the spouse may be required to show a will or deed in which the property was given only to him or her and not to the spouses as a couple.

[JustCurious]

You cannot and should not give a gift and try to control how the gift is used after it is given, and you definitely should not try to force your adult child to get a prenup, I think that would be very inappropriate.

I think you have to choose between (1) giving a gift and accepting that once given you have no control, or (2) designating funds to pass once you are gone. If you choose the latter option, you don't need a trust, you can set up an account with your adult child as the sole beneficiary and make sure they know about the existence and location of the account so they can claim it upon your passing.

[Time2]

Quote:

Originally Posted by Ginny You cannot. Educate your kids and treat them like the adult they need to be. Good Luck!

My daughter is extremely bright, graduated HS and college early. That didn't stop her husband from having a girlfriend. She divorced him.
I can't educate the spouse.
Anyway, I knew I would get blowback, a gift is a gift, you can't control it,

treat them like adults, etc. That wasn't the point.

[Joylush]

Quote:

Originally Posted by Time2 My daughter is extremely bright, graduated HS and college early. That didn't stop her husband from having a girlfriend. She divorced him. I can't educate the spouse. Anyway, I knew I would get blowback, a gift is a gift, you can't control it, treat them like adults, etc. That wasn't the point.

Exactly. You want to protect them. I understand completely. I feel the same way. I have found the only thing you can really do is educate them on how to protect themselves. Not commingling is key. Unfortunately there are still no guarantees, short of establishing a trust.

A future unscrupulous spouse could still come along and convince your son to spend his gifted assets on marital property and on which they could eventually make a claim. That would be a decision your son would have to make in the future.

In my case I have one who can be trusted completely as demonstrated by past behavior. The same cannot be said of their same aged sibling. It’s frustrating wanting to give equally when one is ready and the other is not.

I’m interested in investing in their future, not flushing money down the toilet. I can seriously see my son years down the road wishing I’d kept the money so he could inherit it and have something one day than to have been given it to him early only to waste or mismanage it and end up with nothing.

Or creating a scenario where the thought is, “I wish my Mom hadn’t given me an early inheritance so my spouse could get half in a divorce. If only she had kept it and given it to me later.”

It’s not about controlling as much as it is about protecting. They have to be ready to handle what they’re given or it’s just a wasted effort.

[ivinsfan]

Quote:

Originally Posted by Time2 My daughter is extremely bright, graduated HS and college early. That didn't stop her husband from having a girlfriend. She divorced him. I can't educate the spouse. Anyway, I knew I would get blowback, a gift is a gift, you can't control it, treat them like adults, etc. That wasn't the point.

That wasn't the point of your question? Maybe not but it's the truth...you call it blowback, I call it a fact.



There are a lot of pitfalls in life, financial and otherwise...

[Car-Guy]

Touchy subject... My DD and her husband are both on their second marriages... DD lost a lot in her first marriage, much of which we gave her/them, without any strings. New SIL seems like a nice guy but who really knows. Anyway they needed a new house so I bought one for their use but I kept it in my name.... I "may" do the same for a new car later this year. Just my way to protect bigger ticket items from my POV.

[Fermion]

Quote:

Originally Posted by Car-Guy Touchy subject... My DD and her husband are both on their second marriages... DD lost a lot in her first marriage, much of which we gave her/them, without any strings. New SIL seems like a nice guy but who really knows. Anyway they needed a new house so I bought one for their use but I kept it in my name.... I "may" do the same for a new car later this year. Just my way to protect bigger ticket items from my POV.

How exactly does that work? It would seem you are running afoul of the gifting laws ($15,000 a year) if you are giving them free use of a house and car.

[Car-Guy]

Quote:

Originally Posted by Fermion How exactly does that work? It would seem you are running afoul of the gifting laws ($15,000 a year) if you are giving them free use of a house and car.

There's a bit more detail to this than I have given here... Talk to a lawyer.


BTW, I already file form 709 for other gifting...

[JustCurious]

Quote:

Originally Posted by Fermion How exactly does that work? It would seem you are running afoul of the gifting laws ($15,000 a year) if you are giving them free use of a house and car.

There is no law that prevents anyone from giving any amount of money to anyone else, this is still a free country after all.

In this case, however, if someone buys a house in their own name it is not a gift, even if they let someone else live there, because they haven't given anything to anyone. Letting someone use your house is not the same thing as giving someone your house.

[Fermion]

Quote:

Originally Posted by JustCurious There is no law that prevents anyone from giving any amount of money to anyone else, this is still a free country after all. In this case, however, if someone buys a house in their own name it is not a gift, even if they let someone else live there, because they haven't given anything to anyone. Letting someone use your house is not the same thing as giving someone your house.

Is that true?

Why wouldn't my employer just buy me a house, keep it in his name, and let me live there, then I would agree to take a lower pay, thus having to pay less tax?

[ivinsfan]

Quote:

Originally Posted by Fermion Is that true? Why wouldn't my employer just buy me a house, keep it in his name, and let me live there, then I would agree to take a lower pay, thus having to pay less tax?

Because that wouldn't be a gift it would be payment for services.

[Fermion]

Found it:

"If the daughter lives in the residence rent-free, the parents could be treated as having made a gift to their daughter equal to the fair rental value of the home. For 2016, the annual gift exclusion is $14,000. If the fair rental value of the home is greater than $1,167 per month, or the parents give any other gifts to their daughter that push them over the $14,000 threshold, they would be required to file a gift tax return. In some parts of the country, this may not be an issue, but this client is located in Scottsdale, Arizona where the average one-bedroom apartment rents for $1,225 a month."

https://www.forbes.com/sites/janetbe...h=7e02ce905345

[ivinsfan]

Quote:

Originally Posted by Fermion Found it: "If the daughter lives in the residence rent-free, the parents could be treated as having made a gift to their daughter equal to the fair rental value of the home. For 2016, the annual gift exclusion is $14,000. If the fair rental value of the home is greater than $1,167 per month, or the parents give any other gifts to their daughter that push them over the $14,000 threshold, they would be required to file a gift tax return. In some parts of the country, this may not be an issue, but this client is located in Scottsdale, Arizona where the average one-bedroom apartment rents for $1,225 a month." https://www.forbes.com/sites/janetbe...h=7e02ce905345

Gift tax return is kind of a misnomer..you don't pay any tax it's recorded to count against your lifetime estate tax exemption.They should actually call a gifting report I guess.

[JustCurious]

Quote:

Originally Posted by Fermion Found it: "If the daughter lives in the residence rent-free, the parents could be treated as having made a gift to their daughter equal to the fair rental value of the home. For 2016, the annual gift exclusion is $14,000. If the fair rental value of the home is greater than $1,167 per month, or the parents give any other gifts to their daughter that push them over the $14,000 threshold, they would be required to file a gift tax return. In some parts of the country, this may not be an issue, but this client is located in Scottsdale, Arizona where the average one-bedroom apartment rents for $1,225 a month." https://www.forbes.com/sites/janetbe...h=7e02ce905345

You are not fully understanding what you quoted and taking it out of context. First, it says the parents "could be treated" as having made a gift, that is not the same thing as saying they made a gift. The parents could also be treated as not having made a gift. This gets into complex tax issues that are often subject to interpretation and the answer may vary depending on state law or federal court jurisdiction.

But more importantly, even if it is considered a gift, there is nothing preventing them from doing it, the parents can give how ever much they want to whomever they want. The only thing the law requires is to file a gift tax return if the gift is over the threshold amount...and that is NOT the same thing as being required to pay gift tax. Far from it. You would not owe a gift tax until the total of your lifetime gifts exceed $11.7 million dollars under current law.

So I say this again because there is so much misinformation being repeated on this topic to the point that some people come to believe something that they think is true but is not true... Here is the truth...there is no law that prevents anyone from giving any amount of money to anyone they wish. And even if you give more than $14,000 per year to one person the only thing the law requires is to file a gift tax return, and unless you are gifting very, very large amounts in the tens of millions of dollars you do not have to pay any tax.

[JustCurious]

Quote:

Originally Posted by Fermion Why wouldn't my employer just buy me a house, keep it in his name, and let me live there, then I would agree to take a lower pay, thus having to pay less tax?

Because most employers don't want to be in the business of being a residential landlord. They would have to pay transaction costs, taxes, insurance, maintenance, not to mention the risk of property damage or neglect.

[Joylush]

Quote:

Originally Posted by JustCurious There is no law that prevents anyone from giving any amount of money to anyone else, this is still a free country after all. In this case, however, if someone buys a house in their own name it is not a gift, even if they let someone else live there, because they haven't given anything to anyone. Letting someone use your house is not the same thing as giving someone your house.

That’s not correct. If you are letting them live for free the fair market rent is considered a gift. If it exceeds the annual gift tax amount you have to file the gift tax form. Many other factors come into play as well if it’s being rented below market value, what expenses can be claimed or are limited, etc....thus it’s not that easy.

[pacergal]

Could you "gift" him the money in a savings account that you are also named, ie joint ownership? He could have access to the money for purchases, or keep as savings and if something happened, would you being listed as joint owner keep it "safe"? It may not grow much over the years, though.
I am not professing any tax, legal, nor great financial knowledge, just throwing an idea out! LOL.

[Joylush]

Quote:

Originally Posted by ivinsfan That wasn't the point of your question? Maybe not but it's the truth...you call it blowback, I call it a fact. There are a lot of pitfalls in life, financial and otherwise...

Then why do you insist on repeating it? The OP and everyone else acknowledge it as fact. There are still ways to mitigate risk. Understanding those options are the point of the question. How can I mitigate the risk short of giving nothing at all.

Your “truth blowback” is like anyone asking a question on parenting and your answer being, don’t have kids because you can’t control everything. No, you can’t. Understood. That doesn’t mean there are more right and more wrong ways to do things.

[RunningBum]

Quote:

Originally Posted by Fermion How exactly does that work? It would seem you are running afoul of the gifting laws ($15,000 a year) if you are giving them free use of a house and car.

Since they are gifting to a couple, that's $15K each. And if car-guy is married, the spouse can gift as well. So they can gift up to $60K/yr without any ramifications.

[jollystomper]

Parents seem to assume that if their kids divorce, it is the kid's spouses fault, and ask about how to protect money from a potential ex.

But the odds are 50-50 that YOUR kid will be the one to cause the divorce. In that case would you feel the same way?

As a few others have said, a gift is a gift. No strings attached. Who knows what your kid could have contributed to the marriage dissolution. We often only hear (or are biased) towards ones side of the story.