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Question: We still work at 65 and have $2.6 million saved. One daughter married an attorney with a $600k income. The other married a teacher earning $80k. They’re both stay-at-home moms to toddlers. How do we help our less wealthy child without creating resentment?
Answer: As a parent, it’s natural to want to treat your children fairly. That includes not favoring one over the other. But sometimes, that’s easier said than done.
If you’re still working at 65 and have a $2.6 million nest egg, you may have the flexibility to assist your adult children both now and in the future. But what if your two stay-at-home-mom daughters are in completely opposite financial situations?
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If one is married to an attorney earning $600,000 annually and the other is trying to get by on her spouse’s $80,000 teacher salary, it’s pretty fair to say that the latter daughter needs help the most in the near term. But if you don’t feel comfortable sending money her way without offering your other daughter the same assistance, that’s understandable.
On the other hand, with $2.6 million to your name, you’re in a strong but limited financial position. You may have some funds to spare each month, but you may also be looking to grow your savings before ending your career. And once you stop working, your ability to provide financial support may become even more limited, thereby forcing you to make hard choices.
It’s not an easy situation. But here’s how to navigate it.
“It’s a Medicaid planning decision, whether they realize it or not.” — Evan Farr
Put your financial needs first
It’s generous to want to help your grown daughter who’s raising a family on what’s probably a shoestring budget. But Renata A. Mizak, Partner at Schenck, Price, Smith & King LLP, says you should first make sure you can afford to offer financial support.
“Before taking any action,” she says, “the most important first step is to ensure that your own financial security is protected. You must have sufficient assets, income, and resources to support yourselves.”
Evan Farr, Certified Elder Law Attorney at Farr Law Firm, P.C., also cautions that while you might think you can afford to help your grown daughter, you never know what long-term care needs you might have in the future. And he says that giving gifts to one child or both could create problems.
“It’s a Medicaid planning decision, whether they realize it or not,” he explains. “If either of the parents require long-term care within five years, those gifts will cause penalties that delay access to Medicaid-funded nursing home care or home-based care. This is not hypothetical. It occurs frequently and families are often surprised.”
Before you make gifting plans, reconcile how your generosity might impact your access to long-term care, especially if you don’t have insurance.
Spell out your intentions
Assuming you feel comfortable moving forward financially, Farr says the next most important step is to structure your gifts fairly.
“Providing unequal levels of financial support can lead to resentments among children if not discussed openly with the family,” Farr says. “Even though the high-income household may not require additional financial support, they may compare the outcomes over time.”
That’s why Farr insists that open communication is clear. To that end, he says, first clearly define your intentions regarding your reasons for providing financial support. Next, communicate your intentions to both children before handing over any money.
Finally, he says, figure out whether lifetime financial transfers will be equalized upon death.
“Clarity of intention is what causes disputes, not the amount of money being exchanged,” he says.
Mizak agrees and says that if your goal is to equalize things over time, there’s a pretty clean way to do it.
“One option is to provide financial assistance to the child in need during your lifetime while also including provisions in your estate planning documents, such as your will or revocable living trust, that equalize your children,” she says. “This can help ensure that over time, the total amounts received by each child both during your lifetime and after your death are as fair and balanced as possible.”
Another approach, Mizak says, is to establish a trust now for the child who needs support.
“A trust offers significantly more protection and control than an outright gift,” she says. “It allows you to set parameters around how funds may be used, appoint a trustee to oversee distributions, and adjust future planning if you intend to maintain balance among your children.”
Offer financial support efficiently
No matter what approach you take to offering support to your children, Farr says the structure is important.
“Making outright gifts is typically not the best course of action,” he insists. “If you wish to provide short-term support, consider using documented loans instead of gifts. Documented loans allow you to remain flexible and preserve assets that would otherwise be subject to potential Medicaid penalties.”
Farr also says that in some cases, it could make more sense to pay your daughter’s expenses directly rather than gift her the money. For example, if she needs help paying school tuition, it’s better to write a check to her child’s school than to give her the equivalent amount in cash.
“Paying expenses directly reduces tax liability and establishes clear boundaries,” Farr insists.
Finally, Farr says, make sure to keep good records at all times.
“Document every lifetime transfer and include them in your overall estate plan,” he says. That way, every gift is accounted for when distributing your assets, which could help reduce conflict and bad feelings.
