Many people are dubious about giving a large gift to adult children. If you find yourself having relatively significant amounts of assets, and adult children, this is for you.
In this piece, I share with you 4 smart ways that might allow you to be both tax efficient and supportive (in the right way) to your adult children.
Deciding Whether To Gift To Adult Children:
It is safe to say that most of us want to avoid giving ‘too much’ to our children. Whether they are adult children or not , we want them to learn and understand the value of money. We want them to fully learn how to make, keep and grow it for themselves. We want them to have the ups and downs that we had. Right?
So, why gift money to adult kids while you are alive, rather than leave it in your Will??
- Generally, the time when your kids actually need and will benefit most from the gift, is when they are building their own lives. Often, by the time you die, they will be well established financially, and will be beyond NEEDING the money
- Gifting, in the right way, makes use of tax reliefs you and your kids are entitled to use
- If you give the gift to adult kids children efficiently, will help reduce the portion of your estate that goes to Revenue, and increase the amount of your legacy, when you/your partner die
- If you have it sitting on deposit for the long-term – imagine the erosive power that inflation will have on those sums between now and your demise. Inflation, at an average rate of 2.5% per year, will reduce the value of that by a full 50% in less than 30 years. Gifting it sooner than later may mean far great financial/emotional/lifestyle returns for your children
- Most importantly, gifting to adult children while you are alive gives YOU a large degree of satisfaction and pleasure, as you see them get the benefit of the gift (which you don’t get to enjoy when you’re dead, obviously!)
But It Will Ruin Them!
In many people’s eyes, giving large amounts of our wealth to adult kids is akin to inviting disaster. You may fear any of the following:
- It’ll ruin them, they won’t ever realise the value of money
- They will make a bad investment with it
- They will do something silly with it
- If they split-up with their current partner, they will lose half of it!
- It will eat into their life-time tax-free gift allowance of €335,000 (as of writing June 2022, see Revenue data here)
- We will potentially run out of money ourselves, so we must hold onto all that we have!
The final concern here is a very valid one, particularly in times of high inflation and high market volatility (be that property or equity markets).
Provided you apply prudent assumptions, have a plan for short-term emergencies and have sufficient buffers in place, you can protect yourself from disaster. A full financial plan can really help people in this aspect. We wrote about dying with ‘too much’ 2 years ago this week, have a read of Blog 145 here.
All concerns are potentially valid reasons, but let’s look at some scenarios where those concerns can be allayed.
4 Smart Ways To Gift To Adult Children:
All of the above valid concerns can be at least partly addressed by the following 4 smart ways to gift to adult children.
- The most obvious one, which still quite a few people don’t seem to avail of fully, is the Small Gift Exemption. If you are a couple, you can give up to €3,000 EACH, to anyone, every year, with zero tax issues for you or them! ANYONE! Sticking to the topic, a couple can gift up to €6,000 every year to each child. But importantly, they can also do so to each child-in-law, partner, grandchild, etc. Taking an example; you have say 3 kids and 3 sons/daughters-in-law, and 5 grandchildren. In that scenario, as a couple, you could potentially be gifting €66,000 per year to them in total. To really spell this out, over the course of the next 15 years, you could pass on just short of €1m totally tax free! If that sum were instead subjected to CAT of 33%, you’ve just saved an unnecessary €330,000 tax bill.
- You may have assets other than cash which you may see merit in gifting. There are circumstances where it may suit you to transfer/gift it to an adult child, instead of selling or disposing of it and transferring the cash proceeds. It is not something you see a lot of, but can be used. If you hold shares in a listed company, for example, you may feel it beneficial to transfer them to a child/children. In such circumstances, you are liable for any Capital Gains, and there is Stamp Duty of 1% to be paid on the transfer. However, depending on the circumstances and your preferences, it may be preferable to do this than to sell them and then gift the cash. You could of course do an annual transfer of €3k worth from you to a child, which would be under the Small Gift exemption. If you made a larger transfer, then you’ll be eating into their lifetime threshold.
- The following is another potential means to gift to adult children, that will require full tax & legal advice before pursuing. This may be worth exploring in the situation where you wish to gift a larger sum to children, for a particular need that they have. Is there any reason that you could not give a Loan of the money to your child, documented in a Loan Agreement? Per current Revenue rules, this inter-family loan ought to have an interest rate applied equivalent to the rate you would otherwise receive had you the money on deposit (which is almost zero!). This loan, for illustration, is €150,000, paid to your daughter and her partner. It is to be repaid to you at a rate of €12,000 capital per year, and therefore to be repaid in 12.5 years. Is there anything to stop you giving that loan of €150,000, and then each year gifting €12k to the couple, who in turn repay you €12k per year capital, plus a few euro interest per current deposit rates? An interesting approach which does not appear to over-step any rules.
- Many have a fear that the adult child will be wasteful with a gift that you may give. Unless they have some other need for it, why not agree with them that the money is to be saved/invested each year, or at least a certain % of it? Aside from the Small Gift Exemption, one of the most tax efficient things we can do these days (provided we have taxable income), is to invest in a pension. Is there any reason that your gift could not be invested in a pension scheme, whether a personal pension they have, or as an Additional Voluntary Contribution (AVC)? Not only are you passing assets totally tax free to the next generation/friend, they are also getting either 20% or 40% tax reduction on what they subsequently put into the pension! If we assume that these assets would otherwise be taxed at 33% CAT, we are saving 33% tax plus they are getting additional tax relief, so a total tax ‘win’ of either 53% or 73%! Plus they are getting invested for potentially 20-30 years, over which compounding returns will further multiply the value of what you have passed onto them, and help them reach financial independence. What’s not to like about that! If doing this, please ensure they are suitably invested in a decent portfolio and not some middle-of-the-road product that won’t work as well as it should.
Your Gift To Adult Children
A deep dive on any particular approach could help develop and determine the optimal strategy for your circumstances. Quite often there are tax, financial planning and legal aspects to explore fully, if you investigate it to the 9th degree.
There is a bit of work in that, and you will most likely benefit from having a solid tax expert, solicitor and Financial Planner on your team to develop a plan. But that work can and usually does pay financial, emotional and life-planning dividends for both you and your adult children.
4 smart ways to gift to adult children. You may be doing little, some or most of this, or you may not. Either way, I hope that these ideas have given you food for thought, and help you make the most of what you have created.
Also, for a few ideas on how to reduce the amount of your estate that gets taxed, with other strategies have a read of our article here from 3 years ago – the strategies still stand.
Thanks for reading,