The wealth gap between parents and their adult children has never been greater and there is a common narrative that many adult children are still receiving financial support from their parents. The numbers tell us that the majority of young adults who could be considered “financially independent” from their parents by their early twenties has continuously gone down in recent decades. What does this mean for you? It may mean that you are continuing to supplement your child’s income so they can support themselves financially or perhaps you are making larger loans or gifts to your children periodically. If you chose to do so, you should understand the consequences and consider whether you want to reflect this loan or gift to your child in your estate planning documents.
If you lend your child a large loan for a down payment on a house for example, you should evaluate how this will impact the money distributed from your estate to your other beneficiaries. You may consider forgiving the loan as your child’s inheritance or you may want to reflect the details of the loan so it offsets that child’s percentage distribution at the time of your death. Either way, it is important to document the loan and your intentions if you want it to be addressed in your estate plan.
If you plan to gift your child the money then you need to be aware of IRS rules. In 2020, if you give more than $15,000 to any one person then you may need to file a gift tax return with the IRS. Additionally, gifts to support family members can be a useful tool to reduce your overall tax burden. Advanced gifting strategies should be discussed with your estate planning attorney and tax professionals.
If you plan to loan the money to your child then the IRS generally wants to see that you are charging market rate interest. The interest paid to you may be taxable income to you and deductible by your child. If you don’t charge interest, the IRS may consider that a gift for gift tax purposes. If you do structure the money as a loan and your child defaults then you may be able to deduct as a bad debt on your own tax return. You would need to have documentation to support that the money was intended as a loan and not a gift.
It is also important to note that if you pay an institution directly it generally isn’t considered a gift. For example, if a family member wants to support a child’s education and pays the college directly, the money given to the institution is not considered a gift and doesn’t count against the annual gift limit.
Gifting or lending money to your children is one way to help them in today’s world. While many of our clients want to help their children, it is important to know the tax consequences and how the gift or loan impacts their estate planning. As with any financial decision, you should consult with a financial planner or tax advisor so you understand the rules and properly structure it so that you are comfortable. Once you’ve determined the best way for you to structure the deal, then it is also important to consider its impact on your estate plan.
- My Estate Plan is Signed, Now What? - March 23, 2023
- What is Supported Decision-Making? - February 17, 2023
- IRS Increases Estate and Gift Tax Exemptions for 2023 - February 7, 2023