In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss things to consider when gifting and loaning money to children. There are tax and financial implications when it comes to gifting, but you can do it right when you understand all the legalities.

Listen in to learn the importance of understanding the purpose of gifting money to your kids to help you structure it and think of the implications. You will also learn how to navigate the legalities of loaning money or co-signing a house with your kids.

In this episode, find out:

• Understand the purpose of gifting money to your kids to help you structure it and consider the implications.
• Think about your own financial stability before gifting money to avoid becoming a liability.
• Think about the potential tax implications to you when gifting the money while still alive.
• Consider how to navigate the idea of estate planning, family dynamics, and your legacy.
• Why co-signing a house with your kid is the least desirable option for gifting money.
• How to navigate the legalities of loaning money to your kids to buy a house.
• Advantages of loaning money to your kids, plus the importance of having the right documentation in place.
• The different things to consider when it comes to gifting, transferring, or loaning your family.

Tweetable Quotes:

• "Exercise caution before presenting money as a gift, ensuring that you are certain it won't be spent, unless you are confident in having a predetermined amount set aside."- Radon Stancil
• “Although the act of giving can be rewarding and satisfying, it's important to carefully consider the various implications involved in gifting, transferring, or loaning to your family.”-Murs Tariq 

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Radon Stancil:

Welcome everyone to Secure Your Retirement podcast. We are excited to talk to you about a topic that we get asked about quite a bit as we help people with retirement focused financial planning. And that is around the idea that as people have lived a good retirement, they start sometimes thinking, do I want to give money to my children now so I can actually watch them get it and be able to see the joy or see whatever it is that they're going to do with it and not just leave it behind as an inheritance. We've also had the topic which we're going to tackle today as well, what if I just want to help my child by maybe either giving them some money for a down payment on a house, co-signing for them on a house, or the other one is maybe I loan them the money and then I charge them a nominal interest rate and they just pay me back on payments and then the loan gets forgiven at my death. So we're going to kind of tackle all of these kind of things to think through.

I just had a client in the other day and that was the topic. She said, "I know my financial plan is sound. I'm kind of thinking about wanting to give some money to my two daughters now, just so that I can see them benefit from it and really feel that joy, not just leaving it behind and not being able to experience it." So we're going to talk this through and kind of take us through one idea at a time. So Murs, if you want to get us started and this is just to really give you context. This is a thought process. This is not rules based. This is just a thought process.

Murs Tariq:

Yeah. So the first thing I think you want to be thinking about is what is the actual purpose for the gift? Are you trying to help out a child because their finances aren't where you want them to be or where they want to be so you're trying to help out, whether that's with regular monthly contributions to their daily living or helping them buy a car. What are you actually doing this for? Because like Radon just mentioned, you could structure some things as a loan or you could just give some money outright to them depending on what the purpose of the gift is and is there an intention for the child to be paying it back. Understanding that is going to help you structure it, think it through, and also think of the implications as well.

Radon Stancil:

Yeah, another thing to think about here is your own financial stability. This is the conversation I had with a client the other day. She is in her mid-sixties and her financial plan looks great. As we talked it through and we were discussing this idea, we ran all the numbers for her and it was no problem for her to gift some money to her children. But as we talked through the conversation, what we really came up with is maybe she should wait a little bit longer, maybe until she's in her mid-seventies to do this. And the rationale behind it was is that we got another 10 years, we could really make sure that the financial plan is stable and that she's not going to worry. Because the longer you go, the better we know how we're doing. Because if you think about it, if I give money to the children, I'm not giving it to them with this prerequisite that they got to save it and that if I need it back, they're going to give it back to me.

We are gifting it to them, which means it's no longer ours. And so if I put myself in financial jeopardy because I was trying to do that, well, that's not good because now I could possibly become a burden to my children or become at least a liability to them. And my whole goal was is to make sure that I was going to be able to see the joy behind it. So don't do it too quickly in our opinion, unless you just really know that I've got a certain amount of money that I'm never going to spend. It's just completely off the block.

Murs Tariq:

If you're going to be leaving behind more than that, then you have to start documenting how much you're giving while you're living, and then they're going to add it to how much do you leave behind after you pass. And that's going to have a whole different tax scenario to it if you're above that number. But for most it's, well, okay, I can give 18,000. Is that going to be taxable? So from an estate tax perspective, no, but from your personal income tax, now we have to think about what dollars are we actually giving? Are we giving cash that's in the bank? Well, that money's already been taxed, so highly unlikely that that would be taxable to give away. Let's just imagine we're staying under the $18,000 exclusion. But if you don't have the cash in the bank, then you start to look elsewhere. And let's just go to the example of you have some stocks and you say, "Let me sell some stock to give them $18,000 each."

Well, now we are talking about tax implications to you. Even if you're using that money for yourself, you would be paying potentially capital gains tax. And so just because you're giving it away doesn't mean you get to avoid the capital gains tax on yourself. Gifting to family unfortunately is not a charity so you do pay taxes there. If you give money to charity though, that does have tax advantages and a lot of times that can be tax-free. But if you're given to your kids, there are no tax advantages there so where the money comes from is going to be taxable.

Go to an IRA. Maybe all of your assets are in pre-tax type of money like 401(k) IRA. Any withdrawals that come out of that are going to be fully taxable. So in order for you to get 18,000 net, you may have to take out 22, 25 thousand depending on what your income tax bracket falls into. So tax implications I think you do want to strongly consider because while you're living it's going to affect your taxation more than it's going to affect the person that you're giving to. And we are very particular about staying in certain brackets as well as staying away from this Medicare IRMAA surcharge thing. So you don't want a gift that you gave to come back and surprise you in the following years because you went over a certain limit and now you're being penalized on that for doing so.

Radon Stancil:

All right. I'm going to talk about kind of a couple of things all bundled into one and it's kind of this idea of around the estate plan and the family dynamics and then what my legacy is because that's kind of all one big bundle there. And here's the scenario that we have had occur sometimes is, let's just pretend I've got two children, makes my math a little bit easier. And one of my children, I want to give them some money now because they need a little bit of help. The other one doesn't need much help right now, so I'm not going to gift them money. Well, the idea is if the one child finds out that I've been gifting 18,000, 20,000 dollars a year to this one child all to help them out, they may go, "Well, that's not fair" at the time of inheritance. And again, this may not get talked about, but sometimes parents and everything want to make sure that everything is fair.

So what you can do is if you're helping a child in some way, maybe you're gifting money to one but not to the other and you just are trying to help that one child, is you could keep a tally of it and basically have it in writing that that amount is a part of their inheritance to offset the one child who didn't get anything while you were alive. So that's just something to keep in mind that kind of keeps it fair. Let's go back to some simple math. Let's say I had a million dollar estate and I gifted 200,000 to one child over a period of years and the other child I didn't give anything to. Well of that money, 200,000's already going to have been the gift and the remaining part is how I would split things up. So just keep that in mind as you're thinking that through because that is something that gets talked about quite a bit.

Murs Tariq:

All right, so let's transition to now a more specific type of topic around gifting, which is the question that Radon had the other day in a meeting was, how can I help assist my child with buying a house whether it's through co-signing, helping with the down payment, coming up with the loan. I think there's a lot of things to consider here. And so Radon, why don't you kick us off?

Radon Stancil:

Well, I'm going to tackle the one that I don't like the most, okay? And that is the co-signing. So you might think, "Oh, if I co-sign, I'm helping my child with their credit" maybe if they've got a credit issue. The problem with the co-signing is if I'm co-signing just to help them get the house, and I don't really want to be financially involved in this situation, you're involved financially. So if you co-sign and your child doesn't make the payment, then you're the one they're coming after. So you're putting your credit, you're putting your finances on the line in order to do that. Now if you understand that and you say, "Hey, even if my child defaults, I will step in and buy this house", and I'm not saying that's inappropriate. I'm saying you got to have that mentality in place and clearly defined in your understanding before you co-sign. So to me, co-signing is the least desirable out of all of these situations.

Now you got the other two, which is I loan them money to buy the house and we can talk about that structure. Or I gift them money. What's a more common one though that we get is, I've got extra money. I could put the money in the bank and let the bank give me interest or I could actually just help my child and loan them the money, but then I'm going to get that back in payment. So maybe we could talk about that scenario there a little bit, Murs.

Murs Tariq:

Yeah, and I had another one, which is they just need help with the down payment and what the client ended up doing... Well, I asked the question of, "Well, how much are we talking, 50,000, 100,000?" They said, "Oh no, maybe just like 10,000." Once you're below that 18,000 that we've talked about of the annual exclusion and you have the cash available, that's usually going to be the easiest route to go just because you write the check if you've got it. If it's not going to hurt you financially long term, you can write the check. I could write one to my son and then also my wife could write one to our son. So there's two gifts that are given to the same person. That works just fine. So there's a lot of ways where you can get around just the $18,000 amount.

Now when it comes to saying a larger number, now maybe you're loaning a hundred thousand as a loan, not a gift. Now you need to structure that properly. I think for sure you would want to have some legal documentation saying this isn't just some family loan, although it's designed that way. There's paperwork involved, there's signatures on both parties with an agreement that this will be paid back over a certain period of time with a certain amount of interest attached to it on a regular schedule. Just like a mortgage or any other loan would be, you want to make that legitimate so that you can avoid the gifting type of scenario that can go against your estate tax exclusion. So I think understanding the loan piece of it is important.

I think that can be a good way to go if you're just trying to help them get started. You know they've got good jobs and they've got the ability to pay it back. They just don't maybe have the credit right this moment to leverage themselves as well as expensive as the house is, or maybe they just don't have the down payment saved up, but you know they've got a good financial future. I think that could be a very viable option. You just got to think it through and get the legal part down.

Radon Stancil:

Yeah. The one thing on that is when you come to... So again, go back to what we're talking about here. We're trying to say, I'd like to give my kids money and I don't want to have to report this as a part of the estate, and maybe even I want it as a little bit of a cashflow back to me. You do have to charge a minimum interest rate and that's something that you want to talk to your tax consultant on or your financial advisor to help you understand. You just can't say, "Hey, I'm going to give you this as a zero interest loan" because that now looks like a gift, right? It is a gift. So what you want to do is say, "No, I'm going to charge a minimal interest rate", and there is a calculation on that of how we can do that, but I could charge that interest rate.

Now I can say it's interest only. They don't have to give me back principle. I could just say you're going to give me the interest every year or I'm going to amortize it over a 30 or 40 year period. I could do that. The other cool part is I could say, "Hey, here's a hundred thousand dollars. I'm going to finance it for you. We're going to charge an interest rate. You're going to make payments back to me", but then what I can have in the paperwork that at my death, the remaining part of the loan is forgiven. So now it's just an inheritance. So there are ways to structure this where this is not a debt that your kids have to carry on after your death, but there's some advantages there in a couple of different ways. One, you could be getting some income yourself with earning interest on your money.

The second one is it's a little bit easier for your children sometimes, especially with current interest rates. You might be able to give them a better interest rate because your math is not going to be the same math as a mortgage company would. You're not going to probably charge them closing costs. So there's some savings there that if you have this extra cash and you want to help them in that way, do it.

One little caveat. Think about what happens if you don't pay the bank. What does the bank do? Well, the bank has that house or property as collateral and it's legal. So I understand that this is your children, but you still want to... Murs said it. You want to have the right documentation in place so that if your child does get into some financial trouble, you're able to come in and help navigate that. And it might mean, "Hey, we got to sell the property." We got to fix the situation. You could find your own self in a very bad financial situation. And so you want to make sure you work with an attorney at least to help you draw up that document. Any other final words there, Murs?

Murs Tariq:

I think we can bring it back full circle on what we talked about at the beginning of the podcast, which is a step-up in basis. So I'll give you a quick example. Let's just say I have two properties...

Radon Stancil:

Hold on one second, Murs.

Murs Tariq:

Uh-huh.

Radon Stancil:

You're talking about last week's episode of step-up in basis?

Murs Tariq:

No, the one we were just doing.

Radon Stancil:

Oh, we were talking about step-up in basis here. We just talked about last week the step-up in basis and I got confused.

Murs Tariq:

Right. Oh, yeah. So step-up in basis. That's something to consider is that let's just say I have two properties. I have my own house and I have a beach house and the kids love the beach house and I'm considering... They want it and they're going to inherit it, but I'm considering, "Well, why don't I just give it to them while I am living and gift it to them while I'm living." Well, you're helping them get a property, which is what we're talking about today, but now you're gifting them outright and while you think it may be a great idea at the beginning because now it's off your books, right? It's not anything that you have to worry about any longer, the maintenance or anything like that. But if it's highly appreciated property, we are giving up something very valuable, which is that step-up in basis that we talked about in that podcast episode.

So you don't want to ignore that. While gifting can feel really good and it can be something that is very fulfilling, we also want to think about all of the different implications when it comes to gifting or transferring or loaning to our family. So just wanted to bring that up to speed.

Radon Stancil:

All right, we've talked about a lot. If you have any questions on this topic and you'd like to chat with us, go to the website pomwealth.net. Top right-hand corner, click on schedule a call. We would love to be able to have a conversation with you around this topic. We actually have software that helps us build this out and let you see the impact of it to your overall personal financial plan. So feel free to do that. There's also a blog written on this very topic as well, pomwealth.net. Go to the blog page. We hope you have a great week. We'll talk to you again next Monday.