The Bakersfield Californian
October 8, 2015
My clients, who I will call Keith and Sue, retired a few years ago. Keith worked for a government agency and Sue owned a bookkeeping business. They had one son, Robert, who is an orthopedic surgeon in Southern California.
Keith and Sue worked hard and saved their money. They are “very comfortable” in retirement. Keith receives a six-figure pension. Both waited until they were 67 to begin collecting Social Security. They took advantage of tax-deferred savings plans to set aside additional retirement funds. They also made prudent investments that now add regularly to their income. Their home in Bakersfield is mortgage-free.
A few years ago, Keith and Sue began “gifting” to their unmarried adult son, who still is paying off loans that helped finance his medical school training. The IRS allows each parent to “gift” up to $14,000 a year, or a total of $28,000 for a couple, without paying a gift tax. Keith and Sue have been gifting this maximum.
Keith recently came into my office and confided that the gifting was causing problems between him and his wife.
Keith is an “up from the bootstraps” kind of guy. He worked his way through college. He and Sue worked hard for every dollar they made and saved. The couple lived frugally so that they would be able to provide for their son and support themselves in retirement.
But now Keith is fuming over Robert’s use of their generous gifts. Keith had hoped the young man would apply the money to paying down his student loans and saving for his own retirement. Keith fears that his son’s retirement plan hinges on inheriting money and property from his parents when they die. The truth is, Robert is receiving and spending his inheritance now on luxury cars, flashy vacations and “outdoor toys.”
Sue has a different view of their gifts to Robert and his use of the money. Basically she believes a gift is just that – a gift. What Robert chooses to do with the money is his business. After all, Robert is a doctor, who earns a good living. They raised him right. They should trust him to make good spending decisions.
Keith and Sue’s dilemma is not uncommon. Many couples struggle and disagree over whether and how to gift money to their adult children.
According to a recent study by the Employee Benefit Research Organization, 44 percent of households age 50 or above gave money to their children or grandchildren during the two years ending in 2010. This was an increase from 38 percent recorded during a study in 1998. The average amount of the “gift” was $10,000.
Likely this increase stems from estate planners advising that it’s better for older people to give away their money gradually while they are alive. The cash transfers will minimize the inheritance taxes heirs pay.
Gifts can be made in a number of ways. Some people use trusts that structure payouts and strictly define how money can be used. A parent also can offer to pay down a debt, make a purchase, contribute to a down payment, fund an IRA or insurance policy, or contribute to a grandchild’s college fund.
A gift can come with strings attached, as Keith seems to prefer. Of it can be an unencumbered, as Sue prefers.
Whatever a gift’s amount and purpose, it must be accompanied by a clear understanding of the giver’s motivations and desires.
Keith and Sue took this advice. They sat down with their son and Keith shared his concerns. He told Robert he would like him to use their gifts to pay off his student loans and invest. Robert agreed. He is still taking flashy vacations and buying “toys,” but he is using the money he earns from his medical practice to do so.
Used properly, periodic gifts can be gentle helping hands from one generation to the next. They should not create an unhealthy dependency.
Billionaire Warren Buffett said it best, “I want to give my kids enough money so that they feel they can do anything, but not so much that they do nothing.”