I have had an increasing number of clients approach me asking an increasingly-difficult question: “Should I provide my child with funds for her first home down payment, or focus on my own lifetime needs and leave my (presumably larger) estate as an inheritance when I pass away?” This is not an easy decision, since it depend both on the parent’s finances and health issues, and the child’s cash flow and social issues.
Many middle-class parents realize their children’s purchasing power for real estate is significantly weaker than theirs was: Real estate prices have outpaced income growth over the last twenty years, while the number and cost of financial commitments (such as student loan debt and health insurance payments) have increased dramatically since parents bought their first home. Many children now continue living with their parents well into their twenties to grow their bank accounts instead of growing grandchildren, increasing the chance that they will never have children of their own. So how should parents expecting to live into their 90s on limited resources determine whether to gift funds for a down payment or instead create a financial legacy for their children once they themselves die?
Here are some factors parents should consider before opening their wallets for yet-another costly expense for their children:
- Set reasonable expectations regarding mortgage costs. You clearly don’t want to gift funds for a down payment if your child is going to apply for an unreasonably-large mortgage (and risk defaulting). A down payment should be given after a discussion about what monthly mortgage payment are acceptable to the parent as a condition to the gift: You likely have more experience paying a mortgage than your child does and should offer insights and set the conditions of the gift. You should also try to avoid being a co-signer on the mortgage to avoid exposing yourself to your child’s financial hardships. If your child finds this unacceptable, leave them money in the future using your Will instead.
- Confirm whether the child’s career and income are viable for the long-term. If a child has a profession with a reputation for stability, giving funds for a down payment may be more-suitable. Nursing, accounting, and computer programming tend to be stable career paths with reliable incomes that allow for consistent mortgage payments.
- Confirm the strength of the child’s marriage: If a child is having marital problems, gifting them a down payment is like making a gift to your future-ex-son-in-law. Family Law courts are supposed to segregate gifts from marital assets, but this gets tricky when the child and her spouse were both paying for the mortgage and utilities. Make sure to file a gift tax return to evidence that you gave the gift to your child, so you can better-protect it in the case of a future divorce. If the marriage seems weak, consider leaving a bequest for when you die to give the marriage more time to dissolve.
- Prepare to discuss possible inequality in gifts to different children. No two children have the same income, assets, financial habits, needs or locale, so some children require more financial help than others. If there is going to be dissimilar gifts amongst children make sure to discuss it with both children and decide whether you wish to set-aside additional funds for the child receiving a smaller down payment. Many children perceive even the smallest sibling inequality as a great injustice and may take out their frustrations on their parents and the other sibling; trying to keep unequal gifts a secret from the other child will only make matters worse when your disparate treatment is discovered.
- Ask if the child has creditor issues. Creditor issues are venomous to procuring a mortgage and maintaining a house: Creditors can place liens on real estate that must get paid upon the eventual sale of the house. A parent should demand that the child shows them a copy of a recent credit report. Any child with recurring creditor issues should probably have his funds transferred to him using a trust at his parent’s deaths.
- Explain that there may be nothing left over in the future. While children always feel entitled to their parent’s money, they do not always realize that mom and dad do not have limited resources. Since the whole purpose of this exercise is to either give today or tomorrow, you need to make it clear that if the child would rather receive the money today that this is the last “hand out”, and that you are planning to spend the remaining funds on yourself and not the grandchildren’s education or post-mortem gifts.
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