For many, having adult children is like having built-in best friends, someone to help you around the house, help run errands, and be a pal and confidant. As such, many like to offer monetary support. Here are some things to consider before doing so.
1. No Taxes for Adult Children
When parents pass away and leave everything to their adult children, adult children are often burdened with expenses like paying an inheritance tax. However, you and your spouse can each give your adult children up to $18,000 a year while you’re still around. Anything more must be reported to the IRS. Furthermore, it should be “gifted” and not labeled as a lifetime transfer to avoid any excess taxes.
2. Tax Laws Have Changed
In 2017, the “lifetime exclusion” was for $5 million. However, it has been increased to around $7 million, meaning you can gift more money to your adult children without costly penalties.
3. Consider a 529 ESA for Adult Children
Another way to leave your adult children money and bypass costly taxes is to start a 529 ESA. This kind of account allows them to have money toward their education, school supplies, and textbooks and is unrelated to the annual gift limit.
4. Give Adult Children Money Rather than Assets
Typically, assets appreciate over time. While that’s great news, it does have a downside. Capital gains tax, taxes on the amount the asset appreciated, will go to the recipient. In this case, your adult children will pay a hefty fee for the value that’s been gained on assets over time. “When you give them appreciated securities, you are giving them the gain as well,” says Colleen Carcone, a director in the wealth planning strategies group at TIAA.
5. Inheritance vs. Gifts
Meanwhile, if they inherit the assets AFTER your death, they receive the “stepped up value,” Carcone explained. As such, they won’t have to pay taxes on the “gains achieved in your lifetime.”
6. Protect Adult Children from Themselves
Whether it’s home loans, student loans, a car loan, or credit card debt, the monetary “gifts” given to adult children can be susceptible to being taken away. For instance, if they don’t manage their bills properly and go into collections. However, you can set up an account that protects assets from creditors. In turn, protecting your adult children from creditors, and themselves if they become overwhelmed by debt and their spending habits.
7. Consider Their Future Plans
A “spendthrift trust” according to Kiplinger is meant for beneficiaries who may be likely to sell assets prematurely. This type of trust allows the beneficiaries more freedom and flexibility than other trusts, giving them more control over the trust.
8. Speak with Adult Children about Finances
Death and divorce are 2 of the hardest subjects for people, particularly when it comes to protecting their children. Subsequently, over ¼ of Americans surveyed by Edward Jones, a financial services company, don’t plan to speak with their children about their financial plans for the future. However, experts agree that parents should speak with their families to avoid conflict. Siblings and other family members may dispute your decisions, increasing the risk of a legal battle among relatives. Instead, everyone should know what they’re getting and why, in advance.
9. Put Plans Into Writing
While most parents want to trust that their adult children will never cause them harm and have ill will toward them, greed, desperation, or addiction can cause people to act out of character. In many cases, they act out against their family and the people who love them. As such, a contract will help ensure that your wishes and expectations are carried out, even after you’re gone. Chief legal officer Mary Kate D’Souza shared a story that “haunts” her.
A “Haunting” Story
A retired couple with 4 children was making end-of-life arrangements, regarding their disabled daughter. They planned to build an addition onto another daughter’s house for the parents and their disabled daughter and the able-bodied sister would care for her disabled sister after their parents had passed. However, a few months into the new living arrangement, the able-bodied daughter had other plans. Sadly, she started the eviction process. “The daughter argued that the money was a gift. The parents were heartbroken. There could have been a contract that would have protected the parents,” explains D’Souza.
10. Lastly, Don’t Enable Them
While most other tips have been regarding legal aspects, one important element of giving adult children money is less pleasant to face. How can you give adult children money or support when they don’t make sound financial decisions and come to you for help without “enabling” them?
11. Tips for Standing Your Ground
According to Psychology Today, several tips can help ease uncomfortable discussions about money. Firstly, set clear boundaries and expectations, (getting everything in writing) to protect every family member and ensure everyone is on the same page. Secondly, be “supportive but firm” because “bailing them out” at every crisis will stunt their growth and prevent them from learning “difficult but necessary lessons about financial responsibility.”
More Tips
Next, encourage them to take accountability and solve the problem on their own, before coming to you to be their safety net. Additionally, you can encourage them to negotiate with lenders or create a debt repayment plan. Lastly, don’t feel guilty for making difficult decisions and setting boundaries. Although it’s difficult, and may cause some pain and turmoil, it’s a good idea to set boundaries. Try encouraging adult children to problem-solve. This will help them in the long run, and prevent you from feeling burnout or being taken for granted. You can keep boundaries by encouraging them to seek legal advice and keeping your personal relationship separate from the stresses of money and legal matters.
If You Must
In some situations, bailing out adult children is acceptable and encouraged if their tough spot is minor, accidental, short-term, or rare. For instance, if they’re between checks and short on gas or groceries for the week. Bailing out adult children or not, having tough conversations, and making realistic and sound financial decisions will benefit everyone in the long run and give your family more time to enjoy one another.
Read More: 10 Things To Help Adult Children Heal From Narcissistic Parents