As your children grow into adults, your relationship with them naturally evolves. You love them and may want to continue to support them in various ways but, when it comes to supporting them financially, things can get complicated.
You’ve worked hard to build a nest egg that will afford you peace of mind in the latter part of your life. This nest egg, however, is fixed in the sense that you’re no longer adding to it from earned income. Now that you’ve reached the spending phase of your financial plan, you have to balance your personal budget with your desire to gift money, whether it’s to your children or favorite nonprofit.
While there are many practical factors to consider such as tax implications, there can also be emotional consequences to gifting money. Setting up the expectation that you are there as a financial backstop may hinder your child’s independence, while also draining your own resources. If you cut off all support too early, you may limit their ability to gain the education and experience they need to succeed down the road.
If you are considering gifting money to your adult children while you are alive, it’s important to be thoughtful in your decision. According to a recent study by CreditCards.com, 74% of parents with adult children continue to support them financially. Most of this support comes in the form of helping with debt, cell phone bills, transportation and rent. Some even allow their children to live at home.
If your financial plan is solid and allows for gifting during your lifetime, helping your kids gain solid footing financially may be an optimal use of your discretionary wealth. If, however, you will put your retirement at risk by increasing your expenses, the potential consequences are likely not worth the risk.
In this case, it is a good idea to have a frank conversation about your financial plan with your children. This is a good discussion to have regardless of financial circumstances, but it may be especially necessary when supporting them now will drain your resources to the point that they would need to support you in the future. Not only do you risk them being financially dependent for the long‐term, but you also may prevent them from learning the skills necessary to support themselves at all, putting both your relationship and financial security at risk. If you do choose to provide financial assistance, set clear boundaries and a time and/or dollar limit.
Another pitfall of gifting assets to your adult children is that it may cause resentment or anger between siblings. Gifts can be perceived as being unequal, both in value or ongoing responsibilities. Gifting illiquid assets, such as real estate, may prompt disagreements about maintenance expenses, who’s managing the properties, or whether to keep or sell the asset down the road. If there is any emotional attachment to the asset (like a family beach house), the disagreements can be magnified. Again, communication is key. Having an open family discussion before you gift may save time and emotional energy for your children in the future. After all, you are trying to do something nice for them!
If you have significant wealth you want to transfer to your children, you should consider protecting the assets by creating a trust. When assets are held in a trust, their management and use are dictated by the trust document. A trust can allow you to specifically dictate the who/what/where/when of how you’d like your assets to be distributed. What’s more, a trust can provide protection of your assets in the case of a divorce, mental illness or general immaturity of your beneficiaries. If you have children with special needs, a carefully written trust can be essential to providing for their welfare when you’re no longer around to care for them.
There can be significant benefits to gifting money during your lifetime, one of them being the satisfaction that comes from watching the positive outcomes resulting from your gift. Your end goal is to help your children succeed, while maintaining your own financial security and enjoying a healthy parent‐child relationship. A little bit of thought and upfront, open communication will go a long way toward meeting these goals.