Why Giving Cash to Your Children May Not be a Good Idea
Episode 222 – Most parents are naturally inclined to provide financial assistance to their adult children. But be careful: it may do more harm than good.
Transcript of Podcast Episode 222
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, we’re going to discuss why giving cash to your children may not always be a good idea.
It seems that for anyone who accumulates wealth, at some point in their lives the natural inclination is to want to share it with their loved ones. The only question is how. But be careful. There can be significant perils to giving away cash, and doing so can often cause more harm than good.
Experts agree that there is a significant difference between an urgent short-term need, such as medical bills or a divorce, and simple lifestyle maintenance. Most parents, if they can afford it, are willing to help when a truly urgent situation arises. But a short-term need can easily become a long-term dependency. As author Susan Covell Alpert explained in a 2019 New York Times article, “You’re rescuing them temporarily; you’re not indulging them forever and putting them on your payroll.”
And you need to do a certain amount of homework. No matter how much you trust your kids, it’s usually a good idea to verify that the need is real. Sadly, there are some adult children out there who are all too willing to take advantage of their loving parents.
It’s a dilemma many parents face: how much, if anything, do you give to an able-bodied adult child who asks for help? Since the pandemic began a few years ago, there has been an increased tendency for some millennials to stay home longer, get married at a later age, and rely more on their parents for the basics. You need to be careful not to create a dependent adult child. Some experts have suggested that it is best to charge your adult children rent, and to not pay any allowance without some strings attached.
And exactly how do you provide that help? It could be a gift, a loan, or maybe even an advance against their inheritance. If it’s a loan, it’s best to make sure that it’s fully documented. Otherwise, there’s a risk that your loan may eventually be deemed a gift.
The story of Thomas Gilbert Jr. is a particularly harrowing and extreme example of what can go wrong. The son of a wealthy hedge fund manager, his parents had fully funded his Princeton education. But he struggled considerably as a young adult unable to hold a job. And his parents agreed to help him out. They funded his lifestyle with a generous allowance and by paying the rent on his Manhattan apartment.
But the parents decided to cut the allowance off when he reached age 30. Gilbert Jr., who had previously shown signs of mental illness, became enraged. He eventually shot and killed his father, and in 2019 he was sentenced to 30 years in prison for it.
If you do decide to help out your kids with cash, remember that in 2023, the gift tax annual exclusion is $17,000 for each person you make a gift to. That means that a married couple can generally gift up to $34,000 to each of their children without any tax complications.
Some parents may choose to give their kids appreciated stock instead of cash, in the belief that the stock will likely appreciate further. But there is a potential tax trap here; in most cases your cost basis in the stock will become the child’s cost basis. So if the child decides to immediately sell the stock, there could potentially be a significant capital gain. Say you bought some company stock for $5 per share and gave it to your daughter when it’s worth $50 per share. If she turned around and sold it, she would pay a capital gains tax on the $45 gain per share.
Note that this does not apply to inherited assets. If your daughter inherits the stock when you die, her cost basis would be “stepped up” to $50 per share, and she could sell it at that price without a capital gain.
There are a variety of financial, personal and emotional issues that come into play when you make a gift to an adult child. Contact your Security Mutual life insurance advisor today to review your goals and objectives for yourself, your family, or for your business. Your Security Mutual life insurance advisor will work closely with your tax and legal advisors to create a plan that best fits your goals and objectives.
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