An older relative wants to give my daughter $19,000 when she turns 18. I said no. Who’s right?
“How could this relative gift money to our daughter without granting her immediate and unsupervised access?” (The subject of the photo is a model.) – Getty Images/iStockphoto
An elderly relative makes annual gifts to minimize future estate taxes. He wants to give $19,000 to my daughter, who will be 18 this year. While we’re incredibly grateful, we don’t think it’s healthy for very young adults to have access to large amounts of money without working.
There are obvious concerns about being “spoiled” or wasting funds, but we also worry about the potential for addiction or abuse. I have seen many young people get into trouble after inheriting large amounts of money.
Plus, being broke and saving money in college is a rite of passage, right? It creates character. We’ve worked hard for 18 years to instill a strong work ethic and teach budgeting skills, and I don’t want to see that come back.
Which brings me to the question: How can this relative amount of money be gifted to our daughter without giving her immediate and unsupervised access? The university is currently covered by scholarships and a 529 plan, for which we are grateful.
We plan to give him some money to spend and will also help fund his Roth IRA. We need to figure out the rest (about $13,000 per year). I would prefer not to hire a lawyer and set up a trust, but will consider that option if absolutely necessary.
When your daughter turns 18, she will have the right to vote, open a bank account in her name, and even buy a home in most states. – MarketWatch image
Everyone’s rite of passage is different. No two are the same.
Your daughter is 17 years old. When he turns 18, he will reach the age of majority and will be able to legally vote, open a bank account in his name, and even buy a home in most states. He/she will be legally old enough to make his/her own financial and other decisions.
In reality, it may still be your responsibility. That means living at home, following your rules, and going to college with your financial aid. If he wants to continue receiving your financial support, it makes sense for him to follow your rules.
But in the long run, I don’t see why your own opinions should be your decision about whether an elderly relative decides to give (or not give) a $19,000 gift to your daughter. This can significantly help her rent an apartment and even save for a down payment.
This can be a springboard for his first investment in the stock market, put compound interest on his radar, give him a taste of what it’s like to watch your investments grow, and provide peace of mind that he’ll likely have a more comfortable retirement.
This may actually do the opposite of what you fear most: It can instill in him financial responsibility and maturity that encourages good habits: setting aside money each month for an emergency fund and retirement savings, and finding a 410(k) compatible company.
Or it may make you think about starting your own company or becoming a business owner. Who knows which path you’ll choose? The more freedom and options he has, the more exciting his future will be. That $19,000 could push him further instead of holding him back.
However, it’s also understandable that you want to protect him from potential risks such as addiction, abuse, or bad financial decisions; especially if there is a history of this in your family or, more importantly, if your daughter has had problems in the past.
To qualify for a Roth IRA, one must have earned income. Contributions are limited to the lesser of earned income or the annual contribution limit ($7,000 for under age 50). Within the framework of these rules, you can gift the money to him in return for his contribution. Eligibility to contribute phases out at higher income levels; approximately $150,000 to $165,000 for single filers.
There are ways to balance giving him gifts while maintaining oversight: A “family-managed investment account” where money is invested under your control and access to funds is limited until certain goals or milestones are met.
Your elderly relative may also set up a trust for your daughter and deposit money into it with the instruction that she will not have full access until a certain age (e.g. 25). The person who creates the trust (relative/donor) sets the rules.
The trustee, your relative or you and your husband, can manage the money. The terms could allow limited access before age 25 for things like education, emergencies or housing, and could also provide for gradual distribution rather than lump sum payments.
A revocable living trust is flexible but is generally used for a person’s own assets during their lifetime. An irrevocable trust, on the other hand, is used more for gift-giving and estate planning purposes and generally cannot be changed once established.
Other options that generally do not require the assistance of an attorney include custodial accounts—such as the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA)—but the recipient usually receives full control at age 18.
Any money you deposit into such an account is an irrevocable gift, just like putting stocks into an irrevocable trust, which means you can’t get it back and the funds are deducted from your estate and they don’t get an increase in basis.
Irrevocable trusts may include disposition protections; UTMA entities cannot do this. Courts have ruled that 529 plans in which people save for their children’s or grandchildren’s education should be treated as gifts for tax purposes, even if they are in their parents’ names.
You and your elderly relative want what is best for your daughter: motivation is key here. There will come a time when your daughter will be very happy with $19,000. It’s not enough to change his life, but it’s enough to help him along the way.
