Opening up the dialog to give money to my kids

[mystang52]

Why not start with a smaller, but not insignificant, monthly stipend? I'd include one string attached; to wit, you can't predict the future so in any given month(s) you may not make a payment. Once you and they are comfortable with that, you can always increase the monthly amount or add an annual lump sum.

 

[Aggie1999]

Related question. Is there a way to take advantage of the 18k gift tax exemption, but not give the person access to the money until a later time? Thinking about the tax advantages of transferring now with the gift exemption each year, but the person currently being young and irresponsible.

 

[jim584672]

Glad I don't have children. They can watch as I spend down the pile on worthless junk. Annuitize the stack and laugh at them. Bootstraps ain't gonna lift themselves up, kiddo.

Sorta kidding.

 

[pjigar]

Related question. Is there a way to take advantage of the 18k gift tax exemption, but not give the person access to the money until a later time? Thinking about the tax advantages of transferring now with the gift exemption each year, but the person currently being young and irresponsible.

This was discussed in an another thread: How To Setup Investment Account For Adult Children

But my take is: It is better to teach kids to be responsible with money (carrot and stick) rather than hope that they will become responsible someday. If teaching does not work then you have to show some tough love but keep trying. But at the end of the day: you can only lead horse to the water...

 

[erkevin]

Related question. Is there a way to take advantage of the 18k gift tax exemption, but not give the person access to the money until a later time? Thinking about the tax advantages of transferring now with the gift exemption each year, but the person currently being young and irresponsible.

If you wish to hold off and gift larger amounts later, you still won't be on the hook for any taxes unless you exceed the lifetime exemption which is over $13 million. Say that you want to hold off, and then in 2028 you want to gift $50000. You just fill out IRS Form 709 for the excess above the yearly exemption. Easy peasy.
Alternately, I suppose you could open a savings account for them surreptitiously and fund it. The problem there comes at tax time when they receive a 1099 int. Or open a Roth (if they are eligible) and fund that.

 

[Sunset]

Related question. Is there a way to take advantage of the 18k gift tax exemption, but not give the person access to the money until a later time? Thinking about the tax advantages of transferring now with the gift exemption each year, but the person currently being young and irresponsible.

Congratulations on having more than $13 million per person (if couple) !
Below that is not an issue Fed wise.

 

[pacergal]

We gift small amounts yearly at Christmas, no strings attached as how they choose to use it. Once given, it is theirs. (But we taught them well , I think)
We let both kids know we would help with $X amount as a down payment when they bought a house.
Individually, we offered to help DS pay off a school loan and DD pay off medical/infertility then maternity bills for emergency C section and healthy baby! They both graciously and thankfully accepted.

If you plan to gift money, start talking about it now.

 

[Texas Proud]

Related question. Is there a way to take advantage of the 18k gift tax exemption, but not give the person access to the money until a later time? Thinking about the tax advantages of transferring now with the gift exemption each year, but the person currently being young and irresponsible.

Yes there is... you can gift them the money and put it in an account and have them sign a letter stating they have the right to it right now but choose not to take it...

We did this many many years ago with a gift of an annuity from my mom to all the kids, spouses of kids and grandkids... heck, I think I still have the letters even though mom died in 2019 and assets have been distributed...

 

[SecondCor521]

Related question. Is there a way to take advantage of the 18k gift tax exemption, but not give the person access to the money until a later time? Thinking about the tax advantages of transferring now with the gift exemption each year, but the person currently being young and irresponsible.

Sort of but not exactly.

In order to qualify for the $18K annual exclusion amount, it must be a "present interest", which essentially means that they have to have access to the money.

There is something called a Crummey trust and a Crummey letter, which are both named after the person who established the principle via a tax court ruling.

Essentially what you do is transfer the $18K into a trust and send the person a Crummey letter saying they have 30 days to take the money out if they want to, but after the 30 days the money has to stay in the trust.

Because they have access to the money for that 30 days, that satisfies the "present interest" requirement and thus the $18K qualifies for the annual exclusion.

I was the recipient of Crummey letters when I was younger. I was basically given the letter but then also told verbally that it would be better for me in the long run to leave the money where it was, and it was also hinted that they would disapprove of me taking out the money to the extent that future gifting might cease.

If you don't provide the Crummey letter, as I'm sure some people might be inclined to do, technically that means there is no "present interest" and therefore I think you would not qualify for the annual exemption, and you'd either be in some sort of violation of the gift tax or estate tax violation, or you'd have to fill out the gift tax form.

 

[erkevin]

SecondCor,
Great info. Never heard of that. Thank you

 

[Aggie1999]

Congratulations on having more than $13 million per person (if couple) !
Below that is not an issue Fed wise.

Don't fall outside the current estate tax exemption amount, but given another 30+ years and my gut feeling, the lower the exemption will be, I certainly may be at the time of my death.
[mod edit]

 

[livingalmostlarge]

I need to start that conversation with my kids but they are middle and high school. My mom recently as in the last month or two has mentioned it repeatedly because she's leaving everything to them. That I need to prepare them to inherit a few million each. She thinks by 40 for sure potentially 30. 15-25 years away. She turns 73 shortly and they are 14 and 12 and longevity runs in our family. I did not expect this at all and knwoing that my kids will get everything from her is a bit shocking especially how much. I think it surprised my mom as she has dealt with my dad and grandmother dying in the last 6 months.

My mom has been super conservative with preserving their money and saving it for when they "need it." Well she'll never outspend or outlive her money and realizes it now. And it's made her very pushy about getting me to start talking to my kids about what they are getting from her.

My kids know college is paid for. I've been very up front that we've done well enough that college anywhere is not a problem. I've discussed this with the kids and shown them their investment accounts. At 9th and 7th, my high schooler wanted to understand her constraints for college. So the kids get it. I showed them the 529 but haven't explained the ESA or taxable account or the irrevocable trust we've also set up for them. So I probably need to have a conversation by the end of high school.

 

[Texas Proud]

SecondCor,
Great info. Never heard of that. Thank you

Well, read my post just above... I just did not give the case...

It does not have to be a Crummey trust... there are others... it just has to have the ability to take money out now and have a letter stating they had that right but did not exercise it...

Now, this is way back in my memory and I do not know about now... but when I did taxes way back when it was only good in the 5th Circuit... but I think it is good all over now...

 

[Koolau]

It would still benefit them for you to fund a Roth. If they inherit the Roth, they have only 10 years to empty it, but if you fund a Roth in their name, it can grow for the rest of their lives.

This was how we began helping our kids financially. For instance, when our boy was younger, giving him a couple of grand (or 10 grand as we did much later when he bought a house) would have gone to buying a newer, hotter car. "Directing" the gift was our subtle way of setting him up for later success financially, which he has now accomplished.

The kids' roths (that we funded) have grown very nicely and puts them a lot closer to FIRE than we were at those ages. YMMV

 

[sengsational]

If you want a complete discussion of gifting early, consider reading the book "Die With Zero" (the title is hyperbole).

We passed-through the inheritance DW got from her dad (we didn't need it), no strings. Now we're constrained a bit, trying to smooth lifetime income taxes, but still giving.

No strings, primarily because I don't care to control them. They are smart and capable. They may not do what I'd do, but what do I know anyway? Nobody really knows. I don't want to guide them toward a down payment versus a champagne toast. That's their decision. All I say is what I'd do: put it all into an equity mutual fund and forget about it, maxing the Roth...that is, until you need it, at which point spend it. That may be next week or when you retire at age 40

 

[Lucie]

What were some of the successful conversations you had with your adult children before gifting?
I struggle between them having expectations that the gifts will continue in perpetuity (which they probably will), but I think it may be beneficial for their planning if we tell them we are gifting $x each year for the next 3 years. We can reevaluate thereafter.

 

[Jerry1]

What were some of the successful conversations you had with your adult children before gifting?
I struggle between them having expectations that the gifts will continue in perpetuity (which they probably will), but I think it may be beneficial for their planning if we tell them we are gifting $x each year for the next 3 years. We can reevaluate thereafter.

I haven’t done it yet, but I think I’d start with the model you’re laying out. Tell them your intention is to do it for life but tell them it’s only assured three years at a time and that obviously if your healthcare requires the gifting to stop, that will be done.

I agree, it would be good for them to have some assurance on time frame so they can plan.

 

[SecondCor521]

What were some of the successful conversations you had with your adult children before gifting?
I struggle between them having expectations that the gifts will continue in perpetuity (which they probably will), but I think it may be beneficial for their planning if we tell them we are gifting $x each year for the next 3 years. We can reevaluate thereafter.

I've had verbal conversations with my kids on the topic at various times. I've gotten into a gifting rhythm of transferring mutual funds from my taxable accounts to theirs early each calendar year as a Christmas gift. So each year I now send them an email with both the practical details about the gift in terms of number of shares and the tax consequences, but also just general information about why I'm doing what I'm doing and the plan going forward. At the end I say I intend to continue the gifting but circumstances beyond my control may change and it would be wise for them not to rely on the gifts.

 

[fh2000]

I also plan to pay for my son's downpayment next year. I plan to file Form 709 for that year.

I read that it is simpler if I transfer the money to my son's account, and have him pay the seller, instead of me paying the seller directly.

Your experience might be different?

 

[Oakster]

I've always had in the back of my mind that I would give my kids some money. I guess I always thought it would be something like help with a down payment on a house. They are mid to late 20's, not married, have good jobs and rent. I've never said anything about giving them money and I'm starting to think maybe I should say something. Do I wait til they get married? Do I wait til they have kids? Do I give them money now with no strings attached (example of "string" - this is for a down payment on a house)? Do I wait til they reach a certain age (e.g. give the older ones money but wait on giving the younger ones money)?

I would wait until they need it. There is something to be said for letting them learn to make their own way. Keep it invested, minimize the taxes and be ready to assist when needed. Things like this are very specific to individual situations but realize that giving money comes with good consequences and bad. The last thing you want to do is to have them waiting around on more money from you and hold back their growth and earning capabilities for themselves. Maybe pay for big family vacations or get-togethers? Those kind of things.

 

[Happy30]

My parents give us $25,000 every Christmas to spend as we wish. Because of this I was able to retire at 57 with no debt and 3 homes paid for! Plus we put 2 kids through college so they have no debt.

I am doing the same for my 3 kids so they can have some money/enjoyment while they are younger. We also plan to do a family trip to Alaska that we will pay for.

 

[WWDog]

I've always had in the back of my mind that I would give my kids some money. I guess I always thought it would be something like help with a down payment on a house. They are mid to late 20's, not married, have good jobs and rent. I've never said anything about giving them money and I'm starting to think maybe I should say something. Do I wait til they get married? Do I wait til they have kids? Do I give them money now with no strings attached (example of "string" - this is for a down payment on a house)? Do I wait til they reach a certain age (e.g. give the older ones money but wait on giving the younger ones money)?

You need to either sit down with them and explain that this is their chance to secure their future if they handle the money properly or squander it and not have what security it will provide or leave a letter to them explaining that. They have the potential live well or have a great time for a very short period of time.

 

[timbervest]

DD and DS are both in their 30s. Both are self sufficient and have never asked for money. Did help DS with a downpayment but also gave money to DD along the way when times were tough. I keep track and as of now we have actually given both exactly the same amount over the past 10 years. Both has demonstrated they are responsible and self sufficient so since we are in our 70s and FI we will continue to gift up to the annual limit w no strings and will address larger amounts in another decade. They're going to get the money eventually so why not now when then can use it rather than wait until they are old as well. Having open discussions early about money is critical especially if there is substantial assets that will be inherited.

 

[WhenIsItTime]

I would wait until they need it. There is something to be said for letting them learn to make their own way. Keep it invested, minimize the taxes and be ready to assist when needed. Things like this are very specific to individual situations but realize that giving money comes with good consequences and bad. The last thing you want to do is to have them waiting around on more money from you and hold back their growth and earning capabilities for themselves. Maybe pay for big family vacations or get-togethers? Those kind of things.

This assumes they can't handle the gift. How do you find out if you should give them a bigger amount later?

My parents give us $25,000 every Christmas to spend as we wish. Because of this I was able to retire at 57 with no debt and 3 homes paid for! Plus we put 2 kids through college so they have no debt.

I am doing the same for my 3 kids so they can have some money/enjoyment while they are younger. We also plan to do a family trip to Alaska that we will pay for.

I think this is great. In the spirit of 'die with zero'. Same for charities. Give earlier while you are able to watch and see what happens. Then use that information to set handling for remaining estate.

 

[Mr Gadget]

We give "matching gift" to DD for every dollar she contributes to her IRA/Roth IRA. We will extend the benefit to 401k contribution once she is eligible for 401k. You can give up to $18K per parent to son/daughter without any gift tax. The "matching gift" has several benefits:
1. Inheritance start happening now there by saving room for eventual estate tax exemption.
2. DD gets in a habit of regular investing. DD gets to enjoy the magic of compounding over time.
3. DD can have her cake (money) and eat (invest) it too!

PS: We do have strings attached to the gift that DD can't withdraw money from the retirement accounts and she has to provide annual statement to prove it.

I really like your take and am also planning on starting kids and step kids (late 20's) on the IRA compounding ladder as well. My siblings and I have been having my mom disburse gifts to her grandkids for IRA funding for the last 3 years. It was negligible on my mom's account (that we were managing as trustees) and a continuation of what she was doing initially anyhow. None of us need money but she passed a few months ago, so we are each in receipt of a large inheritance now. I'm not funding the entire amount and leaving a portion for them to fill in as well. I figure to get them all paying attention to future retirement, but will require statements each year showing the percentage growth for it to continue, and each of their situations differ and Traditional or Roth may be a better option I am leaving each of them to decide. Of course there are no guarantees so it could end at any time. I also hope to start larger family vacations as well. We will see what happens at the meeting when I lay it all out.