How to distinguish EOC (economic outpatient care)

[SecondCor521]

Hi all.

I have three children: DS25, DS20, and DD18. All three have graduated from high school and are in the process of obtaining marketable college degrees.

They all have different money personalities, and they all are in the process of becoming self-sufficient in various ways and at various speeds.

I want to avoid EOC (economic outpatient care), probably for all the reasons outlined in the book (which I read a long time ago). I have a goal for all of my kids for them to be completely self-sufficient at some point.

I sort of see three categories at this point. I think there are necessities that parents should pay for up to a certain point. I think there are gifts that parents can give their kids. I think there is EOC that can happen.

I will stipulate that there is a variety of opinion on what items fall into which of those three categories and when. For me, I view all of the required things for an undergraduate degree as belonging in the first category as long as some basic criteria are met.

I think holiday presents are in the second category.

I'm not sure how to determine what falls in the EOC category, and I'd like to ask for guidance to determine whether something falls into that category or not. Again, given that there is family-to-family variability in what might be categorized as a necessity, gift, or EOC.

In my idealized and probably somewhat unrealistic world, I'd like this to be a three step process: 1. I'm responsible for all the basics through high school graduation. 2. When they're in college, I pay for the basics (tuition / fees / room / board / books / transportation) and they're responsible for everything else (pizza, beer, dates, clothes, car, cell phone). 3. Once they have a marketable undergrad degree, don't have any debt, and have some money in the bank - which is where my three are headed - they should be able to be 100% self-sufficient and I'm off the hook.

This has actually been working reasonably well with one exception: medical / health care while they're in college. I don't want them to be uninsured. But it's not directly related to college expenses. But I want them to make their own grown up choices. But if they choose to go uninsured and then have a major medical situation, I can't see me or their mother letting them go uncared for or possibly bankrupt.

Also, there's variability in their situations. The oldest's college doesn't care what he does. The middle one requires proof of health insurance and provides a SHIP program as a default unless you prove you have something else adequate. The youngest's school highly recommends it but doesn't provide any SHIP program.

I'm really interested in both (A) the broader question of EOC, and (B) how to treat college medical expenses in the context of EOC.

 

[Sojourner]

As a big fan of The Millionaire Next Door (it honestly changed my life and set me firmly on the path to FIRE), I think EOC is fairly easy to define. It's basically any economic support that is given to adult children on a regular (or semi-regular) basis, where they come to expect it and count on it in lieu of generating those funds for themselves. Certainly, this would include things like giving annual cash gifts to adult children, or paying their monthly mortgage, or paying their monthly medical insurance premiums. Anything that provides a substantial, ongoing, economic benefit to the recipient, whereby it becomes a crutch that weakens their incentives to achieve financial independence.

As to your specific questions about paying for the kids' medical insurance and expenses while they're in college, that's not what I'd consider traditional EOC. It's temporary and it's going to children who aren't quite ready to be fully financially independent. Once they graduate, however, paying for any of their regular, recurring expenses, including any sort of insurance, would be EOC and would be ill-advised from the perspective of TMND.

 

[Navigator]

I am surprised that you found two universities that did not require health insurance. In my opinion, it is just as legitimate a college expense as tuition or books or fees. If you are paying for your kids educational expenses, I would include health insurance, as this is not an expense I would expect them to be able to pay at this point.

 

[Souschef]

All 4 of our children are grown, gone, married and working. However, I believe in giving now while I am alive to see the effects of my giving.
I came into the marriage with quite a bit more than DW had, but I am treating all of our sons the same (we each have 2).

 

[rodi]

Older son's college required proof of insurance.

This year is more of a grey area - he's decided he's not ready for college (and I fully agree!) and has gotten a minimum wage job. He's living at home. He's using our beater truck to get to/from work. We have not started charging him for insurance but he pays for 1/2 the gas (his younger brother shares the truck). We are considering starting to charge him rent that will be enough to cover car and medical insurance and some groceries. We're having "the talk" this weekend.... He's desperate to move out - but hasn't figured out he'd need to get a car if moves out... or at least a very good bicycle. He'd barely be able to afford a room in a shared house in a crappy neighborhood.

Like you, I have a goal of having them self sufficient. Not as worried about the younger son, he has a plan and just has to get out of HS to execute it (he's a senior this year). Older son needs to do some maturing... including financially.

 

[6miths]

'3. Once they have a marketable undergrad degree, don't have any debt, and have some money in the bank.'

You are going to wait to until they have no debt until you feel like you are off the hook? That seems very generous of you.

 

[Montecfo]

We made clear we'd pay for the hard costs of college, he was responsible for walking around money. He was on our insurance. I would not let them go uninsured. But I think through the college it's pretty cheap.

All support stopped after he got a job. He was driving my car and I sold it to him, he got his own in insurance etc. We still buy him things from time to time but nothing he expects.

 

[ivinsfan]

As to your college comment we consider HI to be a basic. I'd just add it to the school expenses and be done with it. That's for your protection as much as theirs. Youngest DD got through her college in 3 years with no debt and treated herself to a backwards gap year. Some domestic and some foreign travel. She financed everything except a few CC bills and her HI which we payed for. MY DH said to me, we have to get it, if she got sick or injured what would we give to make her better, his answer, we'd give everything we have.

The other stuff is a little tricky. It can depend on the child ..we've always treated our fairly equally but don't feel compelled to do so.

But bravo to you for thinking about it now and setting some guidelines..

 

[ivinsfan]

All 4 of our children are grown, gone, married and working. However, I believe in giving now while I am alive to see the effects of my giving.
I came into the marriage with quite a bit more than DW had, but I am treating all of our sons the same (we each have 2).

We give as well, but I don't considering giving to be the same as EOC. EOC implies they can't make it without your money, to me anyway.

 

[SecondCor521]

Thanks all for the comments. Feel free to keep them coming.

'3. Once they have a marketable undergrad degree, don't have any debt, and have some money in the bank.'

You are going to wait to until they have no debt until you feel like you are off the hook? That seems very generous of you.

Sorry, I was inarticulate there.

I aim to help them each get a bachelor's degree without any student loans. I was only referring to student loans with my inarticulate phrasing there.

As for other debt: I actively and regularly discourage consumer debt. Two of the three are natural born savers and very frugal and avoid debt simply because their interest in spending money is practically nil and they've earned or been given money over the years. The third is more of a spender, but even he seems willing to earn then spend and has learned how to save and budget, so although he probably has a low bank balance I don't think he has any debt.

If any of them got into debt, that would be their situation to handle. I'd give them advice and suggestions, but wouldn't rescue them and wouldn't feel on the hook.

...

As far as the money in the bank goes, it turns out that I probably over-saved for their undergrad degrees in college accounts (529s and ESAs). I'm working on tax efficient ways to withdraw the excess, but even with dialing all that up as best I can, there will likely be some left over. I've decided that it goes to them as seed money - could be for a graduate degree, their own kids' college down the road, or a house down payment, or a wedding, or a newer car, or travel to a new location to start a job...whatever they think they need to get established. They are aware of this plan, but know that it's not guaranteed (if college expenses exceed what I think they will, then leftover is less) and don't know exact amounts.

 

[mrfeh]

But if they choose to go uninsured and then have a major medical situation, I can't see me or their mother letting them go uncared for or possibly bankrupt.

Then you should keep them on your policy. I don't see any other option.

 

[Chuckanut]

All 4 of our children are grown, gone, married and working. However, I believe in giving now while I am alive to see the effects of my giving.

+1

Today, right now, thanks to CV and a few other things, my children need some help. They could survive without any help from me. They rarely ask for any. However, I figure it's far better to help them now in the hope they will be better off 10-20 years from now, than to let exogenous factors keep then down and out with a very steep hill to climb to get out of the pit.

Example1: I split my $1200 of helicopter money between them.

Example 2: I pay for both children to have AAA. I don't want either to have to depend on some stranger if their car breaks down.

 

[KarlH]

I have actually just been reading the book and the chapters on EOC. I found it insightful, in that my sibling and I seem to be (like) a case study out of the book. I have always been fiercely independent and frugal. I learned after my father's death that my brother and his wife had spent much of his adult life soliciting gifts and signatures on loans. He has always had a relatively extravagant lifestyle compared to ours, and I finally learned that it was being subsidized through EOC.

We have saved religiously to be able to afford our kids college, and our oldest has started with courses at the local community college this past year. We have enough to cover a decent undergraduate education for him (about 190K split between 529 and UTMA accounts). Our goal is to use this for tuition, books, housing, etc. for his 4 year undergraduate education, after which we hope he will be able to fend for himself. We have a similar amount for our daughter who is currently in high school.

Our current plan is to cover the kids through their undergraduate degrees and hopefully see them become financially independent. If there is money left in their college accounts when all is finished we might let them apply it towards graduate school, or perhapse a new car or downpayment on a home (with them paying the tax obligations).

I am hoping that our kids will develop frugal habits, and have no intentions of elevating their standard of living through regular gifts. I feel that it is important for them to learn to live within their means.

 

[cathy63]

We paid for DD's college (including health insurance) and she graduated with no debt. However, she's living in an HCOL area and while she earns enough to live on and keep a basic emergency fund, she really doesn't earn enough to save for her own retirement, so we help her with that.

I suppose it's a form of EOC, but the benefit comes 30 years down the road, and if we stopped helping her now, it wouldn't change her current lifestyle at all. She does know that this only goes on as long as it makes sense financially for all of us and at some point in the future it might not. The mechanism we use to help her save is to give her shares of stock that have appreciated significantly and have her sell them in her own brokerage account at her 0% LTCG tax rate and then put that money into her savings.

 

[ivinsfan]

We paid for DD's college (including health insurance) and she graduated with no debt. However, she's living in an HCOL area and while she earns enough to live on and keep a basic emergency fund, she really doesn't earn enough to save for her own retirement, so we help her with that.

I suppose it's a form of EOC, but the benefit comes 30 years down the road, and if we stopped helping her now, it wouldn't change her current lifestyle at all. She does know that this only goes on as long as it makes sense financially for all of us and at some point in the future it might not. The mechanism we use to help her save is to give her shares of stock that have appreciated significantly and have her sell them in her own brokerage account at her 0% LTCG tax rate and then put that money into her savings.

Is this legit...what happens at tax time for you....

 

[Sojourner]

I suppose it's a form of EOC, but the benefit comes 30 years down the road, and if we stopped helping her now, it wouldn't change her current lifestyle at all. She does know that this only goes on as long as it makes sense financially for all of us and at some point in the future it might not. The mechanism we use to help her save is to give her shares of stock that have appreciated significantly and have her sell them in her own brokerage account at her 0% LTCG tax rate and then put that money into her savings.

Yes, it's a form of EOC, but not the worst kind. Are you sure, however, she's actually putting all the money you're giving her into her savings (preferably, a 401(k) or IRA), where she can't touch it until retirement? I'm guessing you don't want her to be able to easily dip into these "gift" savings whenever she feels any sort of financial pinch or, worse yet, feels an urge to spend/live above her means.

 

[SecondCor521]

Is this legit...what happens at tax time for you....

I'm not cathy63, but it's legit.

If the parents individually give more than the annual gift limit, then the parents would either have to (a) file a gift tax form (706? 709?) with the IRS and apply the excess to their unified lifetime exclusion of $11.58M per person, or (b) pay a gift tax.

The recipient gets the owner's cost basis and holding period, I believe.

I agree that it's probably a form of EOC, but this hits on how to handle the situation where the parents have excess money that will go to the kids now or later. How to give now without it becoming EOC is something I'll have to think about.

 

[Sue J]

We are considering starting to charge him rent that will be enough to cover car and medical insurance and some groceries. We're having "the talk" this weekend.... He's desperate to move out - but hasn't figured out he'd need to get a car if moves out... or at least a very good bicycle. He'd barely be able to afford a room in a shared house in a crappy neighborhood.

Our younger son lived with us while self employed as a freelance sound engineer. Some months he made a lot of money, some months none or very little. Until his business got more reliable he paid a "contribution to the household" that was a percentage of his income. I think it was around 35%. If he had no income he didn't pay anything. It was an amount that was enough that he felt it, but left him enough to cover his phone, car expenses and allowed him to save. This worked well for all of us. After a while his income was steady enough that we recalculated it to be a fixed monthly amount. The fixed amount was based on a rough guesstimate of his portion of the household expenses. I was really generous with this, with 3 of us living here his food and utilities was maybe 1/5, we didn't ask anything for his room since we had no mortgage. He's a hard worker and a good saver.

When he moved out he had a good concept of how to support himself. He is now 33, married, a father and homeowner.

About health insurance. when he lived at home he was included on DHs retiree policy and he reimbursed us for the small amount that it cost to add him.

 

[Sojourner]

I agree that it's probably a form of EOC, but this hits on how to handle the situation where the parents have excess money that will go to the kids now or later. How to give now without it becoming EOC is something I'll have to think about.

If you give your "excess money" later in life, when the adult children are solidly independent in their careers and their savings/investing/spending habits, then it's not EOC. For example, giving large cash gifts very occasionally (and unexpectedly) to fully grown, financially independent children would not create any sort of dependency or "crutch" that would undermine their incentives to live within their means, save and invest, and practice good financial planning. But regular, ongoing economic support given to younger (or even middle aged) adult children to "help them out" is classic EOC and very often leads to bad outcomes.

Here are four key takeaways from The Millionaire Next Door regarding EOC:

• Giving cash gifts to adult children leads to more consumption and less saving and investing by those children.
• Gift receivers are significantly more dependent on credit than are nonreceivers.
• Receivers of gifts invest much less money (and build less wealth) than do nonreceivers.
• Gift receivers, in general, never fully distinguish between their wealth and the wealth of their gift-giving parents.

 

[cathy63]

Is this legit...what happens at tax time for you....

Yes. She gets our cost basis and pays the LTCG tax at her rate when she sells. That just happens to be 0%. We gave her $12K worth of stock this year, so we're way below the amount where we'd have to file a gift tax return.

 

[daylatedollarshort]

We always paid for medical insurance until our kids had full-time jobs with coverage. Even when one took time off from college and had a contract job, we paid for the health insurance policy for our peace of mind. It was put to good use one year with one hospitalization where we maxed out the deductible pretty quickly, I mean that policy might literally have saved one of our kids' lives. I don't know what kind of care / hospital debt he would have had without insurance, but I'm glad we didn't have to find out.

In college we paid for most of their expenses not covered by financial aid except they had to work for spending money, and some summer expenses when they weren't in school full-time.

We plan to help our kids buy houses eventually. Our kids are pretty frugal. They have no debt, no student loans, are saving for retirement, have used cars, bake their own bread, grow some of their own food, have always lived either in studio apartments or with roommates, etc. They both are in careers they enjoy and work full-time with benefits now. I can see not providing EOC for luxury items like country club dues, but helping with housing in a very expensive housing area when we have the funds to help them live in a nice safe area, yeah, we're going to do that. I mean maybe if we lived where houses were $200K they might not need it, but in coastal California they could probably use some help.

 

[cathy63]

Yes, it's a form of EOC, but not the worst kind. Are you sure, however, she's actually putting all the money you're giving her into her savings (preferably, a 401(k) or IRA), where she can't touch it until retirement? I'm guessing you don't want her to be able to easily dip into these "gift" savings whenever she feels any sort of financial pinch or, worse yet, feels an urge to spend/live above her means.

Yes, she no longer qualifies for the "IRS free file" program since we started doing this, so I offered to do her tax returns with my copy of TTax, which means I can see how much goes into her 401k. I wouldn't know if she borrowed from the 401k or took money out of her Roth IRA, but she's never given us any reason not to trust her with money. She's pretty frugal and has been good at saving in the past.

 

[ivinsfan]

I'm not cathy63, but it's legit.

If the parents individually give more than the annual gift limit, then the parents would either have to (a) file a gift tax form (706? 709?) with the IRS and apply the excess to their unified lifetime exclusion of $11.58M per person, or (b) pay a gift tax.

The recipient gets the owner's cost basis and holding period, I believe.

I agree that it's probably a form of EOC, but this hits on how to handle the situation where the parents have excess money that will go to the kids now or later. How to give now without it becoming EOC is something I'll have to think about.

Got it just wondering what would happen if you gifted to minors. ie grandkids would they pay tax at the parents rates?

I'm not picking your brain a short yes or not would be fine TIA...

 

[cathy63]

Got it just wondering what would happen if you gifted to minors. ie grandkids would they pay tax at the parents rates?

I'm not picking your brain a short yes or not would be fine TIA...

Dependents are subject to "kiddie tax", so it's not a simple yes/no. If the stock sale is their only income, then I think the first $2K of the LT gain would be taxed at 0% and the remainder at their parents' rate, but you also have to consider if they have any income from jobs or other savings.

 

[Teacher Terry]

I think paying for HI is a must.