Don't Make These 4 Mistakes When Gifting Money To Kids!

This week our conversation is all about 4 common mistakes when gifting money to kids. Listen today so you don't make these same mistakes!

1. Giving Too Much Money: It's important to avoid giving away more than you can afford, especially if it risks your own financial security. Only give money beyond what is necessary for your lifestyle and future needs, typically when you're confident that your wealth will last through retirement, which will usually occur in your late 70s or 80s.

2. Giving Unequally to Children: While it may seem fair to give more to a child in greater financial need, giving equally to children can prevent hard feelings. Unequal gifts, though fair, may cause resentment, so it’s best to be cautious.

3. Waiting Until the End of Life to Give: Waiting until the end of your life to give money can result in missed opportunities for both you and your children. Giving earlier allows them to use the money when it's more impactful, like for home improvements or other needs. One caveat to this - there are tax benefits to gifting things like stocks or houses after death, as inherited assets can benefit from a "step-up" in basis, allowing children to avoid paying capital gains taxes.

4. Having Expectations for the Gift: Avoid expecting anything in return, such as specific actions or gratitude, when giving money to your children. Sometimes, gifts may not be as appreciated or might create new burdens, such as managing an inheritance. It's crucial to give without expectations for what the recipients will do with the money.

It is important to be thoughtful and strategic in giving while considering financial security, fairness, and potential family dynamics. Don't give for what you can get in return, give because you want to give!

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Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

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- John's firm website: https://www.trinfin.com

TRANSCRIPT:

John: In retirement, many people think about giving money to their children. On today's episode of Friends Talk Financial Planning, we're going to talk about the four mistakes you need to avoid when giving money to kids. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. Before we get into the four mistakes that people make when giving money to kids, please subscribe. That helps other people find us on YouTube and keeps us going. All right, John, let's talk about mistake number one, and that’s giving too much money away. So what do you have to say on this one?

John: Yeah, as you were doing the introduction, it caught my ear when you said, “Oh, giving money to your kids.” We're talking about kids that are in their 50s or 60s. We're not talking about the minors. Typically, once I'm at the stage where I've kind of won the game and I want to start giving money, it's to my adult children who’re approaching retirement. And that's kind of the basis of things. But don't give money that you can't afford. Sometimes people feel that one of their goals is to give money to their kids, so they start cutting into their own saving and spending to give to the kids.

And of course, what somebody wants to do with their money is their choice. But I think you really got to look, all right, what is my number, so to speak? How much do I need to support my lifestyle? And then when I have money above that, that's when giving to the kids comes in. But just be very careful before you think, “Oh, I want to put giving money to the kids first,” because that can put your own financial security at risk. So just looking at that first and starting with the end in mind is that first mistake I see people make. What are your thoughts?

Bridget: I also think that we should talk about ages when it's usually appropriate. So in general, when people first retire, they just want to conserve their cash. And so, we really talk about this when you have more than you can conceivably spend, which is usually 75ish or 80, probably.

John: Yeah, I think that's right.

Bridget: And it's not that I've never seen younger people do it. Certainly, I have. And that's great because it's usually people who have accumulated quite a bit of wealth, so they really are confident that they can do it. I think that helps. Most times it's older people, but sometimes it’s younger or early retirees. But that's an unusual situation when they've really been able to acquire quite a bit of wealth.

John: It's kind of like when you first start retirement, it's like, “Geez, I think this money's going to last, but I'm not really sure.” And then you start to get to an age when you go, “Yeah, I think this is going to.” And then it's like, “Yep, this stuff's going to last.” And that's sort of the progression. It’s different for everybody, but that sort of timeline is how I see it.

Bridget: Another thing is that when you're that age, you kind of have an idea of how much are you comfortable with keeping in your nest egg and then what's above that? So that helps with market ups and downs. So then you can say, “Okay, I want to have 2 million or 4 million or whatever number it is.” And then whatever's above that is what's game for giving away, but you keep the amount that you're going to need.

John: Let's assume that we’re giving money that we don't need. We've avoided that first mistake and now we’ve got money to give. What other mistakes do we need to avoid here? And one of the ones that I think about is being equal in my giving to family members. And I'll just say that there can be different needs. One of my kids was a schoolteacher and one was a corporate lawyer who made millions of dollars a year.

The one has a bigger financial need. It could be fair to give unequally. But my contention is that even if it's fair, that can cause some hard feelings. But when people give equally to their kids, I've never had it where there's been hard feelings. Fair can cause hard feelings, so I think you have got to really think closely about that.

Bridget: I agree. If the child who's more well off comes to you and says, “Stop giving me money,” that's the point where you know you don't have a problem.

John: Right.

Bridget: If you ask them, you're creating a weird dynamic. “Would you mind if I give money to your sibling?” They might feel obligated to say it's fine, but if they proactively come to you and say, “Hey, I don't need this. What are you doing? Give it to charity. Use it some other way,” then you definitely don't have to worry about this. But I think it's something to be very cautious about if you're considering giving unequally.

John: Yeah. Think closely. It sounds good. And I tend to follow the fair side. It makes sense to me if I've got more, that my sibling should get more, but that can cause problems.

Bridget: Yeah.

John: The other thing I had on my list of mistakes is waiting till the end of life to give. When you’ve got more that's going to go to the kids, don't wait until the end of life.

Bridget: And there're a few different nuances to this. First of all, it’s for their benefit. If they're going to get a decent amount of money, it can help them to learn the skills that you need to deal with it.

John: Yeah.

Bridget: Let’s say you get a bunch of money, and you use it to buy a house. Okay. There're a lot of things you have to learn when you have a house. It gets them used to learning the skills rather than getting a larger amount all later. It helps them learn skills.

John: Yeah. One of the phrases that we use is let kids make mistakes on smaller amounts of money, so that when they inherit later, they've got experience with it. You're going to make mistakes, but I’d rather have it be with $10,000 than $100,000.

Bridget: Absolutely! But then there's also a practical situation about waiting until the end of your life. From a tax perspective, if you have individual stocks or individual mutual funds, when you die, your kids get what is called a step up in basis, so they won't pay capital gains on those stocks, etc. If you give it to them during your lifetime, then they don't get that step up in basis and they'll end up paying more taxes, so you don't want to give them that particular thing. That's kind of a sub mistake.

John: Yeah. And we see that with giving stocks. Hey, the stock has gone up. I put in $1,000, and now it's worth $100,000. Geez, I want to give it to you, Bridget, so my daughter has it. Now when you sell it, you have to pay capital gains taxes. If I hold it and I die and you get it, you have no taxes. The same thing happens with houses. Oh, I'm gonna put the house in the kid's name, but then they don't have that step up in basis. And it can be a really big tax problem. So before you gift something that's gone up in value, especially houses and stocks, be really, really careful on that.

Bridget: I would say that I have one client who was gifted some Apple stock. And I think that's what the person had, because it had such a big run. And so, she was happy to get it. It's not like people are going to be unhappy, but if you're trying to be strategic about it, this is what you should think about. But the person giving the gift might not have had the equal amount of cash sitting around, or at least that's what I suspect.

John: But when you have a choice…

Bridget: She really appreciated the money, so it's not like you shouldn’t do it. But just realize that if you've got a choice, you don’t want to do it on your deathbed.

John: Yeah. There’s another thing about the logistical side of not waiting. If I've got enough money, and as you described, I’m in my late 70s and into your 80s, how old are my kids at that time? They're in their 50s, 60s. I think the average age that somebody inherits in the US is 63. By that time they're well on their way to, if not already in retirement. And even though it's great getting money at that stage, it's less impactful than if you give earlier, when your children still have kids at home or those sorts of things.

I had a friend who was trying to figure out if he could afford to remodel his kitchen. He loved the house, but the kitchen was worn out. His folks gave him some money, so he was able to remodel the kitchen. That was super valuable in his 40s. If they had waited until he was in his 60s, that would have been nice, but it would have been more useful earlier. So the older your kids get, the less useful it can be. So just from a practical standpoint it's more impactful earlier. Plus, you get to see it if you give it to them. If they inherit it, you don't get to see them remodel their kitchen or whatever it is that's important to them.

Bridget: Yeah, I think that's a really good point. The last point is related to that. And it’s don't have expectations. So if you expect them to remodel their kitchen and really love it and you to go over and have breakfast every day in their kitchen, you might be disappointed.

John: Yeah.

Bridget: I’ve known more than one person who received a lot of money from their parents when they were young people in their 20s, and it was weird. First of all, they didn't really want it. They really just wanted to be regular 20-year-olds. And then they had to deal with it. So they've got to deal with this whole throng of investment advisors and all that. And I'm sure the parents thought it was a great thing, but in particular cases, they were not that into it.

John: Right.

Bridget: It just created a lot more responsibility. I'm a fan of the Antiques Roadshow and sometimes somebody will bring in a painting they think is worth $3,000, but it's actually worth $500,000. And once in a while their reaction is like, “Oh no, now I have to deal with this.”

John: Right.

Bridget: I just had it on my wall in my unsecure house when I thought it was worth $3,000, but now I need a security system. And who inherits this? And all kinds of different problems come up. And that's their reaction. I just want to be a regular person. So yeah, don't expect anything.

John: Give for the sake of giving, not because of what it's going to get you in whatever fashion that is. Totally great. Well, hey, I think it's a great place to wrap things up. Again, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both accepting new clients, but if you're looking for an advisor in your local area, you can check out acplanners.org. That's the Alliance of Comprehensive Planners, and we belong to it, love it, and there're a lot of like-minded advisors there.

John: And don't forget to hit that subscribe button.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.