As we enter 2020, it’s certainly no secret at this point that adult Millennials and Generation Z have needed to rely on their parents for financial stability. According to this article from Consumer Reports, as many as 7 out of 10 parents give more money to their adult children than they do to their own savings or retirement plans. Although this article is largely concerned with the effect this pattern of gifting has on retirement and the younger generation’s independence, we’d like to look at the way these gifts affect estate planning.
Does supporting your adult child affect your estate planning?
Karen often meets with clients who are providing a regular source of support for an adult son or daughter. In order to help them build their estate plan, we pose a few questions for them to consider. The first of these questions is, of course, whether their estate plan should ensure that the support continues. If the client’s adult son is living in their home with his family, should the estate plan clearly specify that the house will go to the son when the client dies? If he does inherit the house, how does this factor into the division of assets between the his siblings or other beneficiaries? Is the value of the house roughly equal to his “share” of the assets, or does it go above and beyond?
Although not all parents try to divide these shares equally, those who do desire equal division of assets between their children may wish to take this lifetime of giving into account. If the son in the above example has a sister who has been financially independent and paying for her own home in the same time period, should the son’s share be reduced in the estate planning documents? After all, he received more from the parents while he was alive.
Are there tax concerns when you support your adult children?
In addition to the above concerns, parents who spend large amounts of money on adult children may need to consider the gift tax. The son in our example is living in his parents’ house. If we assume that the parents bought this house for him, it’s also safe to assume that this house exceeds the $15,000 annual gift tax exclusion. Karen encourages parents like those in our example to consider the effect these large gifts might have on their lifetime exclusion (the amount that they can leave free of estate tax after their death). If they have already given similar gifts in the past, did they file gift tax concerns?
Unlike the Consumer Report article, our office has no desire to talk parents out of supporting their children. There is nothing wrong with helping out adult kids. However, we do encourage all parents to consider how these gifts affect their estate planning goals–after all, these decisions will continue to affect those children even when you’re no longer available to support them directly.