Giving money to your adult children is a great way to help them achieve something they might not be able to accomplish on their own. The idea is to improve the quality of life for your heirs, once you’re sure that your own needs are taken care of.
Your gift has the potential to be life-changing to your heir, and you may not want to overwhelm him or her. Consider giving a smaller amount first and then observe how the responsibility is handled. If it is handled well, you can increase your gift next year.
You want to scrutinize the need for money and how it may affect your child’s long-term ability to live, work and succeed in the world, to provide enough money to help a child through a challenge without killing his or her motivation to work and succeed.
Consider the reason for the gift. Is the money needed for an urgent matter, due to a lost job, imminent home foreclosure or a costly divorce? Experts say this is OK if you can afford it. You’re rescuing the person temporarily, not indulging him or her forever by putting your child on your payroll. You don’t want to create dependency.
Another good reason for a gift is tuition. Education and retraining can be excellent ways to help your children be more self-sufficient. Additional certifications or degrees can make your child more employable or may help your child earn more in his or her current job. Many parents give money directly to the educational institution to make sure it is used properly. Another popular gift-giving strategy is to start a 529 savings plan for grandchildren’s college expenses. It’s a true gift but is set aside to be used exclusively for a college education.
Another possibility is giving children a loan rather than a gift. You will have to draw up a promissory note that complies with IRS rules.
You don’t want to stoke feelings of anger or resentment in children who aren’t getting the gift. Make sure your other children know about the gift and promise them similar gifts if they have similar needs. Perceived favoritism is a recipe for family discord. Even if other children don’t need gifts in your lifetime, you can balance it out by giving them larger shares afterward through a will or trust.
A few words on the financial aspects of gifts
Gifts do not have to take the form of cash. For example, you can give a child appreciated stock. Although the child is still on the hook for capital gains taxes, there’s a chance that he or she is in a lower bracket that will allow him or her to pay a lower amount in capital gains taxes — or even nothing at all — when the stock is sold.
Also, you may have to file a gift tax return, even if you don’t actually need to pay a tax (the ceiling, which is adjusted periodically, is very high). Be sure to keep your accounting and legal advisers in the loop. Speak with tax experts from experienced law firms such as Bott & Associates, Ltd.