The_right_amount_of_money_to_give_our_children_while_alive_and_after_we_die
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and welcome to the Financial Samurai podcast.
00:00:04.720 | In this episode I have with me my wife, Sydney. How are you? Hi everybody, good morning. Good
00:00:11.040 | morning, good afternoon, good evening. In this episode we're going to talk about the right
00:00:16.160 | amount of money to give our adult children while we are alive and after we die. I've been thinking
00:00:23.120 | about this topic more and more recently as our children grow older and older. I talked to other
00:00:29.200 | parents and try to hear their thoughts on the strategic planning. Then I see my neighbor who
00:00:34.640 | is now 30 years old and still living with his parents because his parents gave him everything.
00:00:39.200 | He's got nice cars, he's got a motorbike and he hasn't left the house since spending six years in
00:00:44.800 | college for now six years now. So we've seen him since 2014 and he's still there living at home
00:00:52.080 | and that just kind of bums me out. I would think that every parent's hope is that their child
00:00:59.120 | launches, finds something they'd love to do in their career, finds something they love to do
00:01:04.720 | in their life and find love. I mean what are your thoughts? Right, I mean we have seen him. The only
00:01:11.680 | positive thing I will say is that it does seem like he has consistently gone to a job
00:01:16.800 | five days a week because he would start his motorbike up at eight o'clock every morning.
00:01:24.000 | We were awake but it would be kind of annoying to hear that noise. We don't know what job he's
00:01:29.280 | been to but at least he consistently seems to have some form of employment which is good for him.
00:01:37.680 | I know what he does. I don't want to say anything but it's nothing like you're like wow you went to
00:01:44.240 | college for six years to do that. So come on folks this is a new era. People really have to think
00:01:50.720 | about how much they spend their time and money on education, what they want to do. Things are
00:01:57.280 | difficult now. Yeah. So I'm trying to come up with a framework on how much to give our children
00:02:03.520 | while living because before we had children I always thought man parents giving kids cars,
00:02:10.160 | houses, you know stipends while they're already adults seems kind of weak. Weak sauce. But now
00:02:17.920 | as we're parents it seems like okay it's better to give our children money while we're alive. It
00:02:23.840 | makes us feel better and it helps them when they need the money the most than after we're dead and
00:02:29.200 | when they're like 50 plus years old. What are your thoughts? I think it's a great idea to contribute
00:02:36.160 | while we're alive versus only after death. Being able to do both is obviously great too.
00:02:44.240 | Tell me about the conversation you had with your friend on the tennis court about this.
00:02:47.840 | Well I just had I was just hitting with a friend and he's a very successful fund manager
00:02:53.360 | and he was saying well I should probably set up about 10 million dollars for my son
00:02:59.920 | because what if he just wants to be a college professor and make 150,000 a year.
00:03:04.720 | Like that would be tough for his family to survive if his spouse or the son's spouse didn't work.
00:03:11.440 | Oh wow that's that's quite aggressive. I mean that seems pretty aggressive but then if we talk about
00:03:17.120 | the 0.5 percent rule which I discussed and where there's so much backlash 10 million at 0.5 percent
00:03:24.240 | withdrawal rate is uh what is that 50,000 dollars because 10 percent of 10 million is 1 million 1
00:03:30.800 | percent of 10 million is 100,000 so yeah 50,000 dollars. So now that rates are so low right you
00:03:38.720 | know the file the goal post has moved so much hey maybe 10 million maybe that's a reasonable amount
00:03:45.840 | because that's only generating 15,000 a year. If perhaps the son doesn't know it's that big.
00:03:51.840 | Right because I think if if our kids knew that they were going to get 10 million dollars.
00:03:58.240 | If anybody knew they were going to get 10 million dollars they wouldn't be motivated to.
00:04:03.360 | That's true but the funny thing is in 20 years 10 million dollars will maybe will be worth maybe
00:04:11.840 | six million dollars seven million dollars and that's kind of one of the fallacies of people
00:04:16.640 | saying oh I want to be a millionaire and make you know one million dollars or have a net worth of
00:04:21.600 | one million dollars. Back in 1945 if you're a millionaire that was big balling. Oh yeah the
00:04:28.160 | needle's always moving. And so now if you were to compound that one million just by the rate of
00:04:33.840 | inflation from 1945 to 2020 that million is worth more like 14 to 15 million. Yeah. But that's the
00:04:42.000 | thing so if you're gonna leave your kid 10 million dollars that that just seems out of control
00:04:48.320 | ridiculous. Well not very many people would even have the option or the right ability to leave that
00:04:56.000 | much. So we're kind of like maybe wasting time talking about this this level of income and wealth.
00:05:02.640 | So let's talk about the right amount to give while living. I believe that we should follow
00:05:07.920 | kind of the tax guidelines and give the exclusion amount the gift tax exclusion amount. Yeah I think
00:05:14.320 | that makes a lot of sense. So for 2020 the gift tax exclusion amount is 15,000 a year. In other
00:05:21.520 | words every time you give 15,000 you lower your estate amount by 15,000 which means on the back
00:05:30.080 | end when you die you don't have to pay the death tax on 15,000 or any of that gift tax exclusion.
00:05:37.040 | I think you made a good point in your post though that you don't want
00:05:40.640 | or I wouldn't want our kids to get dependent on expecting a set amount of money every single year.
00:05:50.080 | So you had mentioned something about doing it every three years. Right so I think giving every
00:05:56.640 | three years the gift tax exclusion amount seems pretty good because if it's every year then it
00:06:03.840 | feels like income and then you just expect it right. And the gift tax exclusion amount is per
00:06:09.760 | person so both of us can each give 15,000 to each child so 30,000 a year. So once you start giving
00:06:19.760 | 30,000 a year that's a lot. It's like why bother working 30,000 especially if we give them you
00:06:27.200 | know a place to stay and all that you just why bother doing anything. Yeah it's too much. It's
00:06:32.000 | too much so if you want to give 30,000 I say you know you can give that maybe once every six years
00:06:38.720 | which is mathematically equivalent to giving 15,000 every three years. One thing I'm thinking
00:06:44.320 | about regarding the gift tax exclusion amount is since only one percent of people have an estate
00:06:51.680 | worth over 10 million dollars why are we even bothering with the gift tax exclusion amount.
00:06:58.240 | Right like okay so if you die with five million which is still a lot of money you're still 6.58
00:07:07.760 | million away from the estate tax threshold to pay that 40% death tax so who really cares. I
00:07:14.880 | don't understand why people are focusing so much on the gift tax. I guess maybe it's because they
00:07:21.520 | think that that amount won't last so long. It does have a deadline I forget what it is. It's
00:07:27.280 | still in the future but you know anything is possible it could get changed. That's true that's
00:07:33.920 | true good point like historically that estate tax threshold amount was down to like a million dollars
00:07:39.840 | just several years ago and of course it depends on the government laws and so forth. So that's true
00:07:47.040 | I mean to expect the estate tax threshold to continue going from 11.58 million per person
00:07:53.920 | you know to 12 to 13 to 20 I mean it's probably going to cap out at some point. Yeah. So good
00:08:00.480 | point. All right so beyond just giving the gift tax exclusion amount every three to six years
00:08:06.320 | the other big thing I've noticed at least here in San Francisco is that for first-time homebuyers
00:08:11.600 | I think it's like 60% I surveyed a lot of realtors 60% of first-time homebuyers have some type of
00:08:18.480 | help from their parents whether it's partial help or the full 10 or 20% down payment. What do you
00:08:25.360 | think about that? I think adult kids who have parents who are able to help them afford their
00:08:30.880 | first home in an expensive city like San Francisco is a very fortunate thing. You know it's it's
00:08:37.440 | tough I think every set of parents has to look at their adult children individually and see how
00:08:43.680 | motivated they are you know how involved they are with the parents. Right. You know one thing the
00:08:51.440 | parents of the adult kids could do is have the adult kids contribute some sort of mortgage payment
00:09:00.640 | or I don't know make sure that they're involved somehow whether it's paying the property tax or
00:09:07.200 | taking their parents to the doctor you know just doing something to make sure they're not just
00:09:12.640 | receiving and not... Free riding? Free riding yeah there you go. So that is a good point in terms of
00:09:21.040 | being involved in the parents lives not like disappearing for five years or being a deadbeat
00:09:26.000 | after college and like hey mom and dad can I have some money? Right. You know forget that and some
00:09:31.920 | of the commenters did say well it might be more about timing instead of the amount given. So one
00:09:41.040 | parent was saying I think I'll know by the time my kid is in middle school or in high school
00:09:46.640 | whether he or she is on the ball empathetic sympathetic caring hardworking and knows the
00:09:53.600 | value of a dollar and if that kid does know all that stuff and has all those great attributes okay
00:10:01.120 | we're gonna adjust the giving amount accordingly as well as the time frame and if not it's like
00:10:06.160 | no wow why would we give our spoiled kid who doesn't listen who doesn't try hard anything
00:10:12.400 | but the irony on that and that is they might need more help because they don't listen. I know.
00:10:17.600 | How do you figure that out? It's hard for parents especially who have multiple children with
00:10:23.680 | varying degrees of personalities and you know you know strong differences in personality because
00:10:31.360 | you don't want your one of your children to feel that they're you know left out or that they're
00:10:38.080 | overly favored but hey that's parenting that's no it's not easy. It's not easy and then a lot of
00:10:44.880 | parents have gone the default route and said we are going to divide our estate equally among our
00:10:50.000 | children but come on if you raise a very successful child who is financially independent by whatever
00:10:59.200 | whatever age well what are you going to split the estate equally for but then on the flip side that
00:11:06.320 | you want to reward them right? It's like it's kind of like taxes it's like the harder you work the
00:11:12.720 | more you get taxed so why bother yeah that that is interesting and so you know I've talked to
00:11:18.640 | my parents and they said well we're just splitting it evenly it doesn't really matter how hard you
00:11:23.440 | work or whatever or how often you call me or it's just equal. Yeah my my parents had the same thing
00:11:30.160 | they they didn't want us to feel that they loved or cared for one of us more than the other.
00:11:37.520 | What they actually felt who knows. Right we all secretly. I have heard some opinionated comments
00:11:44.800 | from my mom but I won't get about your family politics. Sibling. And you know I won't raise
00:11:50.880 | that on this podcast. Right. But yeah it's families can be very complex. Right and it it just is
00:11:58.000 | terrible how sometimes money can tear apart family relationships. Yes it definitely can it's
00:12:04.160 | unfortunate. It's terrible it's terrible terrible. All right Sam so tell me what your thoughts are
00:12:11.440 | on leaving a house to our kids or helping them out with down payment. So when I was in my 20s I had
00:12:18.960 | a lot of peers get gifted a house or a condo by their parents and frankly I was jealous you know
00:12:26.000 | one day they'd be like oh welcome to my housewarming party. It's a two bedroom you know two
00:12:31.040 | bathroom condominium on the Upper East Side. I was like what how do you afford seven hundred fifty
00:12:35.600 | thousand dollars on our very mediocre forty thousand dollar salary in Manhattan. And the
00:12:41.120 | answer is the parents either paid for the down payment or paid all cash for the place. And that
00:12:48.240 | was something that really got me motivated to try to maybe one day do that for my children.
00:12:55.600 | And again this is over 20 years ago and also kind of fired me up to try harder just to save and
00:13:00.880 | invest more money. And I don't know if it's a good idea. On the one hand it's a reward. OK. They got
00:13:08.240 | a job at a really reputable firm at the time. And so the parents are like well we have excess money.
00:13:14.720 | We're going to help you buy a place in Manhattan instead of spend on rent. Why not. And those
00:13:20.400 | apartments those condos have really appreciated in value since 1999 2000 they're up three X.
00:13:26.320 | And so the rich got richer. They're winning. And so in the beginning I was definitely a little bit
00:13:33.760 | jealous. But over time I realized that actually makes a lot of sense especially if your kids are
00:13:41.040 | if our kids are going to end up in a big city that's more expensive than the median in the
00:13:45.360 | country. And if they can't buy a property for the age of 30. That's that's going to be tougher I
00:13:53.600 | think. But that's also normal. Why should they have everything. So I don't know. It's tough for
00:13:57.600 | me to think about it. The way I'm thinking about right now is why not try to invest in real estate
00:14:03.280 | now. And then 20 to 30 years from now our kids will be like wow dad mom you bought real estate
00:14:11.680 | 20 to 30 years ago for such a great price. Good job. Because think about all of us when we think
00:14:17.840 | man our grandparents could have bought property for what price 60 years ago. That's crazy. And
00:14:24.560 | the bottom line is it's inflation. Inflation is is too hard of a force to go against. So let me
00:14:30.720 | ask you this question. Let's say you did that and your child has one of these great properties in an
00:14:36.960 | expensive city. And then they decide that they're going to move and they're going to sell that
00:14:42.400 | house or that condo for a great profit. Yeah. Now what would you expect as the parent. Would you let
00:14:49.040 | them sell it. Would you not let them sell it. If they sold it would you expect them to return some
00:14:54.720 | of the money to you. What do you think about that. That's actually a good question. So I've been
00:14:59.440 | old holding it and paying property taxes and doing all that for 30 years and then they inherit it
00:15:04.480 | and they want to sell it a year later while I'm still alive. No. No. You're not going to do that.
00:15:09.680 | You might. OK. If you want to do that you want to relinquish this property this great asset that
00:15:15.360 | generates awesome cash flow given it's been purchased 30 years ago and there's no mortgage
00:15:21.120 | and all that. Well maybe you can get one 30th of the income or the equity. Maybe right. If
00:15:29.120 | if it's 30 years old maybe. But the point of these assets is to provide a perpetual income stream
00:15:35.360 | especially in a low interest rate environment. I'm not sure if people truly realize how much
00:15:40.800 | more valuable these income generating assets are. For example real estate income online income
00:15:50.080 | whatever asset you own that generates income has become much more valuable because interest rates
00:15:56.720 | and the risk free rate and so forth have declined so tremendously. Right. 0.5 percent or 0.7 percent
00:16:02.800 | on the 10 year bond yield. It doesn't yield that much income anymore. So if you actually have an
00:16:08.160 | asset that yields a much higher yield then it's much more valuable. But I think the market is not
00:16:14.960 | not really recognizing that this therein lies the opportunity. So back to your question specifically
00:16:20.080 | again I think we also have to have a conversation. Have a conversation. Where are risk assets now
00:16:26.560 | where where's the risk free rate of return. You know what are your financial goals and so forth.
00:16:31.200 | So maybe it's important that if you're going to gift or help your children with a house or any
00:16:39.280 | kind of property to consider who's on the title. Consider who's on the title. Yeah. So if it's on
00:16:45.280 | our title then ultimately it's our decision. So it's just kind of accounting. Well it's not
00:16:51.440 | accounting. It's here son daughter here's the house. But it's actually under my name so too
00:16:59.760 | bad you can't do anything. You can enjoy it. You can manage it. You can earn the income. But if you
00:17:05.760 | want to you know try to sell it and rip it out. Yeah too bad. Too bad. OK. So once we've provided
00:17:12.720 | education some living subsidies maybe a down payment for a house maybe graduate school maybe
00:17:22.080 | I don't know. Is graduate school necessary in 20 years. I don't even know if college is really
00:17:26.400 | necessary in 20 years. Ultimately it depends on what career path you're going to take. Right.
00:17:31.360 | Doctor dentist lawyer education is absolutely essential for those types of careers. You don't
00:17:38.720 | want to go to your doctor. I'm an expert. No no. Yeah that's not good. Yes. More education the
00:17:54.160 | better if we're talking about a doctor. Maybe. You know I got a good idea. Why don't we create
00:17:58.800 | a master's degree for personal finance blogging. Yeah that could be good right. Yeah. I mean come
00:18:06.880 | on money is very important. Very important but it doesn't seem like you need to have any kind of
00:18:14.240 | formal financial training to talk about money which is fine. You know we can just treat it
00:18:21.040 | as entertainment. Yeah. You make some money you lose some money you start all over in life.
00:18:24.960 | That's fine. But anyway. OK. Back on topic. So tell me once we provide the basics education
00:18:32.160 | food clothing subsidized shelter should we provide even more money. I think you know we
00:18:40.800 | could help support the kids in different ways. Doesn't have to be actual dollars in their bank
00:18:46.080 | account or assets. One idea I thought about was taking a radical family vacation with the
00:18:54.880 | adult kids. You know it's hard to be involved with our. What do you think is funny. A radical. What
00:19:01.520 | do you say a radical family vacation. Well not just. What is a radical family vacation. I don't
00:19:08.240 | know. Just something adventurous that's not just you know going to the beach. Oh I love going to
00:19:13.680 | the beach. I know going to the beach. But I'm talking about like radical like skydiving. No.
00:19:21.760 | OK. More all inclusive fun vacation. That's really about bonding. So if let's say the global
00:19:27.760 | pandemic goes away and people aren't scared to travel anymore. So going to a new country
00:19:31.760 | together experiencing a new culture. Yeah. Something like that. You know where you takes
00:19:36.560 | a lot of planning and it costs a lot to go to Jordan or. Yeah. And it's as adults we're busy.
00:19:44.640 | It's hard to dedicate time to spend with our parents especially if they live far away. Right.
00:19:50.640 | Yeah. So I really hope. Bringing them together. Pay for their flights. We're older and our kids
00:19:55.680 | are older that they'll want to be involved with us. And I think. Yeah. You know having a really
00:20:02.160 | fun vacation to look forward to. Yes. Would be a really cool way to have an experience together
00:20:08.880 | as a family and pay for it. OK. Or pay for a lot of it. The other idea is to help subsidize the
00:20:18.560 | cost of grandkids. Yeah. So whether that's contributing to the 5 to 9 plan every year.
00:20:24.560 | I think that's mainly it. Right. Contributing to their education fund. Yeah. That's something that
00:20:31.280 | you know 15000 a year 10. Whatever even 5000 dollars. Something is nice. And that's that's
00:20:38.560 | something that I think a lot of grandparents would enjoy doing. Right. So tell me your thoughts
00:20:44.000 | about giving money to children after. Well after we're dead it kind of doesn't really matter.
00:20:50.800 | Hopefully we live long enough so that our kids are adults. They have their own families. They
00:20:55.680 | have their own money and so forth. So hopefully our kids are over the age of 50 when we die.
00:21:03.120 | And so by that point I don't think our mannerisms the way we see money or spend money changes once
00:21:10.080 | we're 50 years old. I'm just think about I'm just think about my my parents. They're still super
00:21:15.760 | frugal. They don't have any debt. They've got a pension but they still go to early birth specials.
00:21:21.600 | They still don't change the lamp fixture outside the house because they're afraid that once they
00:21:27.280 | change or they don't they don't turn the light on because they don't want to change the lamp
00:21:31.120 | fixture because the lamp fixture is a pain in the butt to change and also cost money. Right.
00:21:35.600 | So I just think old habits die hard. So even if we leave our kids tens of millions of dollars when
00:21:41.760 | they're 50 plus if we raise them right if we've kept in touch with them they're going to do what's
00:21:48.240 | best I think for themselves and for society with the money we leave behind. Yeah. All right. That
00:21:54.800 | concludes this episode. If you enjoyed the episode we'd love a positive review and a rating. It keeps
00:22:00.240 | us going. We're gonna have more and more of these couple dialogues because I think it's just so fun
00:22:05.040 | to catch up and hopefully one day our kids will look back in August 2020 or September 2020 and be
00:22:11.920 | like Mom Dad what were you guys thinking. It'll be really fun. All right. Thanks so much everyone.
00:22:17.440 | Talk to you later. Bye.