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

[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]

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]

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]

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]

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]

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/janetberryjohnson/2016/07/27/tax-rules-for-renting-to-a-relative/?sh=7e02ce905345

 

[ivinsfan]

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/janetb...es-for-renting-to-a-relative/?sh=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]

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/janetberryjohnson/2016/07/27/tax-rules-for-renting-to-a-relative/?sh=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]

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]

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]

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]

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.

 

[Car-Guy]

Could you "gift" him the money in a savings account that you are also named, ie joint ownership?

Or maybe in such a case as a house, just gift them the money directly and have them pay you rent on the house that stays in your name. Report the cash gifts (as necessary) on form 709. (It's no big deal)

Example, could you give them 50k a year in cash and report that on form 709. Then they pay you 1k per month rent (fair value) from part of the money you gifted them. But you keep the house in your name so if there is a divorce, the house is not part of their assets.

Purely hypothetical of course since I'm not a lawyer.

 

[Joylush]

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.

And the son could be a serial killer but the question wasn’t about be worried or concerned about the son’s character or financial spending skills. It was “how do we protect our gift so it’s used for our son and not lost to an unscrupulous spouse.”

There are several answers: Educate your son on ways to keep his gifted assets separate. Set up a trust with your son as the beneficiary. Don’t gift the money. Gift the money and hope for the best.

 

[ivinsfan]

And the son could be a serial killer but the question wasn’t about be worried or concerned about the son’s character or financial spending skills. It was “how do we protect our gift so it’s used for our son and not lost to an unscrupulous spouse.”

There are several answers: Educate your son on ways to keep his gifted assets separate. Set up a trust with your son as the beneficiary. Don’t gift the money. Gift the money and hope for the best.

The original question was just about a spouse and didn't use the word "unscrupulous" So they can still be married and the spouse can unscrupulous, or they could be divorced from a perfectly decent person who wasn't the right spouse for them. Maybe they are married to the exact right person who loves them and shares their values.



It's a lot to keep track of...but the options you listed are the same ..The other option would be to leave the money in your will and hope maturity has occurred. The advantage of that is we aren't around to worry about and see what happens. So less stress which is good.

 

[Sojourner]

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?

My advice would be to open and fund a new brokerage account in your son's name and invest the money in a low-cost, total market index fund. Since he is single, this would be classified as pre-marital assets and generally not subject to division upon a later divorce (although the gains accrued during the marriage might be).

Would it be best to get a prenuptial for any money going into the marriage?

Yes. If/when he does decide to marry, getting a prenup would be very wise to ensure his pre-marital money is protected. The prenup could even be worded to ensure that his pre-marital money plus all gains accrued during marriage would remain his upon divorce.

What about protecting gifted money after the marriage.

Once it's his money, there is absolutely nothing you can do to prevent your son from withdrawing and spending any or all of it on things that would benefit your future DIL.

 

[brett]

Don't know. Years ago my grandfathers brother (a canny Scot) had a daughter who married a pre med student.

He financed them. But...the house he provided for them was not in either of the happy couple's name. The husband had an income but that came from the familiy business as salary. Even the car was belonged to the business. His daughter had no significant income.

Right after med school they divorced. He got nothing. House was not in either name, vehicle not in either name, and his daughter had no significant income hence no alimony.

Some in the family that he was mean to set it up like this. Turned out he was smart as a fox. Which was why he was such a successful business person.

We intend to help our son and sig. other buy a home. We will place a second mortgage on it. Not because we expect it ever to be repaid.

 

[Calico]

Parts of this thread remind me of all the myriad ways my grandmother used "gifts" of money to control (or attempt to control) the behavior and life choices of several generations of her family. It worked on many, but not all, family members.

I noticed this tendency of hers at a young age, and I refused to toe the line just to stay in her good grace$$.

But then I always did have strong opinions, and no fear of expressing them. This did not always end well for me.

She told me years later that she respected the family members who did not live in fear of the money spigot being turned off if they disagreed with her in the slightest way.

We now return to our original programming.

 

[WestUniversity]

Trying to keep items that are considered a separate estate separate is challenging. Setting up the structure is one thing. Aggressively keeping everything separate is quite another...

 

[gman1234]

I think it is a fair question... the gift is intended for their son... and not 50/50 for their son and a potential future spouse (who they may or may not like).

I think you could put it in a trust an make him the sole beneficiary.

https://www.barrons.com/articles/why-some-trusts-crumble-and-some-endure-during-divorce-1458967051

Or you could keep it an put it aside in an account that he is the sole beneficiary of when you pass, but if you pass while he is married then I think those would become marital assets and defeat the purpose.

I don't think that's true - at least not everywhere. I have gone through two divorces and while married, I received money from two different sources (mom and dad). I was told that as long as I don't comingle the funds, it would stay my property - not joint. Though in my case it wasn't enough to worry about...

 

[daytripper]

We use a bloodline trust.
It follows our bloodline.
It passes our estate on to our son, his kids and by passes his wife.
Any trust attorney should be able to do this for you.
It is not that uncommon.

 

[frances]

I'm in the camp of "a gift is just that - a gift".
Once you give someone something it's theirs to do with as they see fit. Period.