After reading the book “Die With Zero: Getting All You Can from Your Money and Your Life” by Bill Perkins, It kinda changed the way I thought about leaving an inheritance. As a parent, I would like the best for my children. Even after they become adults. For some of us parents, that may include providing some financial assistance when possible for major life events and milestones. However, gifting money to adult kids requires some careful consideration to protect your own retirement security. An overly generous gift today could leave you house rich and cash poor tomorrow.
Approach gifting money responsibly by first evaluating if you can truly afford it without jeopardizing your future needs. You know the saying, “put on your own oxygen mask first, then help those around you.” We need to make sure we can afford any gifted funds, and should come from discretionary savings and investments. The gifts should not come from cash reserves earmarked for emergencies or money in retirement accounts. Prematurely withdrawing retirement funds could have severe tax consequences and jeopardize your golden years of retirement.
Before making a gift, take a detailed look at your financial situation. How much can you reasonably gift without impacting your ability to retire on your terms and maintain your desired retirement lifestyle? A financial planner can provide an objective analysis to determine how different gift amounts could affect your retirement outlook.
Clearly Define the Purpose
Not all financial gifts to adult children are created equal. Is this a one-time investment in their future like helping with a first home down payment? Or is it more of a treat like funding a dream wedding? Perhaps it’s intended as a bailout to cover irresponsible overspending.
Gifts meant as bailouts can enable further irresponsible money behaviors if not handled properly. In these cases, it’s wise to make receiving the gift contingent on the recipient participating in personal finance education courses to develop better habits. You can still love your child unconditionally while refusing to subsidize perpetually poor money choices.
I’ve had discussions with my kids about the philosophy of “Die With Zero.” Their inheritance would be less when I pass away. However, if they are making progress in life and If they are working on improving their situation I’d be willing and able to help with some things. Like a down payment for a home, a car, a wedding, or continuing education for example. Or, if they are in a situation like being injured and unable to work. Did they need to move back home for reasons like saving money or leaving a toxic living situation. I’ll subsidize their rent paid to me.
Set Clear Expectations Upfront
Before giving a gift, consider having an open conversation with your child about whether it is truly a gift with no repayment expected, or if it is a loan to be repaid with or without interest. Be very clear on this distinction. If it’s a loan, are you willing to risk not being repaid and potentially damaging the relationship?
For gifts, be aware of the annual federal gift tax exclusion which allows you to gift up to $17,000 per recipient in 2023 without having to file a gift tax return. Married couples can gift $34,000 per recipient. Any gift amounts over that require filing a gift tax return, though you may not actually have to pay a gift tax until your lifetime gift exemption amount is exceeded.
Have a Policy on Repeated Requests
Despite the often quoted line about not being able to get blood from a stone, many parents unfortunately find themselves fielding repeated requests for financial help from their adult children. While one-off gifts may be manageable when planned for, a steady stream of bailout requests is another story.
If this pattern emerges with your child, it may signal something more systemic like lack of income, chronic overspending, or lack of financial literacy. In these cases, strongly consider making any future gifts contingent on the child working with a financial counselor to establish a budget and payment plan to regain stability. This tough love approach helps preserve your finances while also incentivizing them to develop healthy money habits.
Remember, Gifting Should Bring You Joy
Though gifting money, homes, or other assets to your children can be immensely rewarding, don’t give out of pure obligation or due to excessive guilt if you’ll jeopardize your retirement doing so. Your retirement and financial security should continue to be the top priority. That stable foundation then allows you to give freely if you choose to, experiencing the gift’s full joyful impact.
For many parents, a life’s greatest wish is to give their children the opportunity for a better life. But don’t inadvertently leave yourself in a worse financial situation in pursuing that generosity. Take a balanced approach when gifting money to keep your retirement dreams fully funded and intact. Horns up to you and your kids! \m/ \m/
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