Investment math on when parent could consider giving money to adult kids.

[WhatsUpB]

[Topic is now in Personal Finance (Not Investing) - mod mkc]

Common scenario for the forum but one worth continuing to talk through. All framed around safe withdrawal rates and risk I think.

Curious if anyone has a good framework to apply to make things more automatic when parents have "enough" money to give some to kids early (before death and inheritance). There are emotional factors (including the joy of seeing money used before their death) to consider but for this post I am curious simply on people's opinion of the math and investment philosophy on this only please...

70 year old, Single Mother of 3
$38k a year in Social Security
$2.07M in a 50/50 index portfolio (475k IRA, 1.6M taxable) - 58% of NW
$1.5M House paid off in Greater LA - 42% of NW
Thus, net worth of $3.575M

Spends $125k-140k a year on things. So with SS she needs to pull out approx. $85-100k a year from investments for living expenses. Note again please this is a 70 year old with a paid off house.

Please ignore the emotional side, curious on the math and risk side of the house no pun intended. Also, yes I aware of gift tax laws and needing to file paperwork if gifts exceed $18 and each family member can get $18k with no paperwork in 2024. Also also, there will be 15% capital gains tax on getting this money out to give which is acceptable cost given she is not 90 imo.

How much could she afford at this moment to give each of the 3 kids? If not now, when in the future? How much? Lump sum or something per year?

A "safe" 4% on the 2.07M would $82,800 per year. 5% being $103.5k which is a little less "safe" but seems fine.

So if we consider just the liquid investments (IRA+Taxable). I think we would say she is not in the position to give money to each kid, right?

But now take into account the $1.5M house. Consider she is 70, and before we know it 80, etc... this asset is one that I think can and should be considered in the math on what is safe to withdraw from her NW to give to kids now (versus after death).

Said another way with a $3,575,000 NW it seems she could give the kids $100k each to start? More? Less? Other ways to do this and think about it?

Bringing emotions into it at the end for one paragraph, ideally this would help each kid buy a house but it would be up to them if they want to do that with the money, no strings attached or judgement. An extra $100k post tax would very much help each kids reach that goal soon. $200k each more so of course. Also, the joy of just seeing the money in the kids hands before death versus being gone.

What are people thoughts and advice please!

[retired@50]

Common scenario for the forum but one worth continuing to talk through. All framed around safe withdrawal rates and risk I think.

Curious if anyone has a good framework to apply to make things more automatic when parents have "enough" money to give some to kids early (before death and inheritance). There are emotional factors (including the joy of seeing money used before their death) to consider but for this post I am curious simply on people's opinion of the math and investment philosophy on this only please...

70 year old, Single Mother of 3
$38k a year in Social Security
$2.07M in a 50/50 index portfolio (475k IRA, 1.6M taxable) - 58% of NW
$1.5M House paid off in Greater LA - 42% of NW
Thus, net worth of $3.575M

Spends $125k-140k a year on things. So with SS she needs to pull out approx. $85-100k a year from investments for living expenses. Note again please this is a 70 year old with a paid off house.

Please ignore the emotional side, curious on the math and risk side of the house no pun intended. Also, yes I aware of gift tax laws and needing to file paperwork if gifts exceed $18 and each family member can get $18k with no paperwork in 2024. Also also, there will be 15% capital gains tax on getting this money out to give which is acceptable cost given she is not 90 imo.

How much could she afford at this moment to give each of the 3 kids? If not now, when in the future? How much? Lump sum or something per year?

A "safe" 4% on the 2.07M would $82,800 per year. 5% being $103.5k which is a little less "safe" but seems fine.

So if we consider just the liquid investments (IRA+Taxable). I think we would say she is not in the position to give money to each kid, right?

But now take into account the $1.5M house. Consider she is 70, and before we know it 80, etc... this asset is one that I think can and should be considered in the math on what is safe to withdraw from her NW to give to kids now (versus after death).

Said another way with a $3,575,000 NW it seems she could give the kids $100k each to start? More? Less? Other ways to do this and think about it?

Bringing emotions into it at the end for one paragraph, ideally this would help each kid buy a house but it would be up to them if they want to do that with the money, no strings attached or judgement. An extra $100k post tax would very much help each kids reach that goal soon. $200k each more so of course. Also, the joy of just seeing the money in the kids hands before death versus being gone.

What are people thoughts and advice please!

Is she interested in selling the house before she dies?

If not, I wouldn't suggest any gifts.

She might incur significant medical costs later in life. Assisted living, board & care home, etc. are all still possibilities aren't they?

Does she have an airtight long-term care insurance policy that will insulate her from future medical expenses?

Regards,

[mhadden1]

70 year old, Single Mother of 3
Spends $125k-140k a year on things. So with SS she needs to pull out approx. $85-100k a year from investments for living expenses.

At a glance it looks like Mom is already exceeding 4% SWR. Likely that's fine, and a bit of extra giving wouldn't be a disaster, but really I would say things are about exactly right at the moment. Mom is already giving the fabulous gift of not requiring the children to worry about her finances.

[Rajsx]

If she really wants to give her children with a warm hand (vs cold) she will have to sell her paid off house, then she will have more options to give or transfer & gift shares, rather than sell & pay taxes & then gift.
I would rather have children decide to sell shares & pay taxes, Mom moves into a Condo & take vacations & spend some on herself

[avalpert1]

In this framing it is just another expense and that it is for her kids is a red herring - so whatever she'd be comfortable spending in a year, she can give the balance to the kids.

But I'm curious on whose behalf the question is being asked - the parent or the kids?

[Exchme]

She's not in any position to give away money and that will probably last until she decides to sell the house (or poor health forces her to sell). Giving away liquid assets now may force her into a liquidity problem later, where she ends up having to get a high interest loan on the house just to live. Her withdrawals are already plenty high considering that she may live a couple more decades.

[TomatoTomahto]

At a glance it looks like Mom is already exceeding 4% SWR. Likely that's fine, and a bit of extra giving wouldn't be a disaster, but really I would say things are about exactly right at the moment. Mom is already giving the fabulous gift of not requiring the children to worry about her finances.

+1

There’s not enough slack if Mom runs into some expenses beyond the current $125-$140k. The house is paid for, so it makes the monthly spend that much more noteworthy.

[rockstar]

I’d ignore the house. Think of it as inheritance assuming she doesn’t need to sell it to pay for a nursing home.

She’s only 70, so more medical issues can happen between 70 and 80 and drive up her expenses more. My parents’ medical went through the roof in their early 70s.

I’d stick to giving at Christmas time. She likely has enough to give assuming she only lives to 85, so 15 more years of retirement. But I’d want cushion for medical expenses.

[MoreTaxes]

Does she have an airtight long-term care insurance policy that will insulate her from future medical expenses?

I would not necessarily recommend she get long-term care insurance. If she needs expensive long-term care in a nursing home, that would be a good time to sell the house and use the proceeds to fund the care.

Besides that, she has a net worth of $3.5M. In the event she has medical expenses that wipes all of that money out, LTCI is not going to save her. LTCI policies generally have a lifetime maximum payout of $500K or $1M.

Given that the expected return on LTCI is negative -- as all insurance is -- and that she could self-fund the most catastrophic scenario that could be covered by LTCI, it doesn't look like a good fit for her.

[steadyosmosis]

I would not be giving money away if I had a burn rate of ~5% annually, and I might live the majority of 30 more years.

[retired@50]

Does she have an airtight long-term care insurance policy that will insulate her from future medical expenses?

I would not necessarily recommend she get long-term care insurance.

I wouldn't recommend it either, I was just asking to see if this particular 70 year old is somehow immune from future large medical bills that those who "self-insure" without a LTC policy might face.

Regards,

[Wiggums]

I would not give away $300k - $600k at age 80. My Mom went from living on SS and pension to paying $168,000 annually for care.

[jeffyscott]

She might incur significant medical costs later in life. Assisted living, board & care home, etc. are all still possibilities aren't they?

I'd actually not expect that to exceed the current spending of $125-140K.

[TomatoTomahto]

She might incur significant medical costs later in life. Assisted living, board & care home, etc. are all still possibilities aren't they?

I'd actually not expect that to exceed the current spending of $125-140K.

Really? That would help me relax a lot, but as much as I’d like to believe you, I can’t.

[capjak]

She could purchase a $84,000 SPIA with a 3% living increase annually for approximately $1,400,000 or $1,000,000 with no annual increase. That would leave a 1.5 Million dollar home and $600,000 portfolio ($1,000,000 if no increase). I am not supporting buying a 1.4 million dollar SPIA but less may be feasible. Also if the insurance company can pay this amount out she should be able to get similar results on her own (not contractually guaranteed but still likely to meet that level) She may be able to fund a TIPS ladder for say 25 years for less?

So I would say that she can give her children at least $18,000 each ($54,000) this year.

Note: Since she is giving while alive she has a low need for inheritance

[WhatsUpB]

In this framing it is just another expense and that it is for her kids is a red herring - so whatever she'd be comfortable spending in a year, she can give the balance to the kids.

But I'm curious on whose behalf the question is being asked - the parent or the kids?

It is a question on behalf of the mother. You make a great point. I could have framed this as simply someone with a 3.575M NW of which 1.5M is in a paid off house. How much could this individual responsibly give away early to kids when they spend approx $125-$140k a year with $38k in social security. And could they withstand say a one time $300k gift (100k x 3) to start.

Using this framing I think pokes at the deepest question in this post which is - can one factor in their home when calculating if they can withstand giving some money early. When she is 80+ and IF she somehow ran through the 2.07M in investments (less even 300k give away now). She could always sell and rent or remortgage or move into assisted living to unlock this money. Yes there are new costs but still a $1m+ liquid unlock to keep her going to 90+.

I am somewhat surprised anyone is truly worried about her withdrawal rates against 2.07M + a paid house. That all seems fine, a little aggressive for this forum, sure, but overall in isolation she is fine. Question comes back to is she fine enough to make a one time say $300k payout because she wants to help her kids while alive.

[jeffyscott]

She might incur significant medical costs later in life. Assisted living, board & care home, etc. are all still possibilities aren't they?

I'd actually not expect that to exceed the current spending of $125-140K.

Really? That would help me relax a lot, but as much as I’d like to believe you, I can’t.

Average Cost of Long-Term Care in California — 2024

Nursing Home: Private Room $131,349

Assisted Living Facility $72,570

Home Care (44 hours per week) $72,846

https://www.ltcinsuranceconsultants.com ... ltc-costs/

[WhatsUpB]

She could purchase a $84,000 SPIA with a 3% living increase annually for approximately $1,400,000 or $1,000,000 with no annual increase. That would leave a 1.5 Million dollar home and $600,000 portfolio ($1,000,000 if no increase). I am not supporting buying a 1.4 million dollar SPIA but less may be feasible. Also if the insurance company can pay this amount out she should be able to get similar results on her own (not contractually guaranteed but still likely to meet that level) She may be able to fund a TIPS ladder for say 25 years for less?

So I would say that she can give her children at least $18,000 each ($54,000) this year.

Note: Since she is giving while alive she has a low need for inheritance

I am starting to think she can do this as well as $54k (gift) + $125k-$140k (expenses) - $38k (SS) = $141k-$156k

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

But if it can, then it seems like she should keep doing this calculation each year and give ~$54k or w/e math works out that keeps her at approx a 4% safe withdrawal against her end of year NW each year. Thoughts?

[avalpert1]

She could purchase a $84,000 SPIA with a 3% living increase annually for approximately $1,400,000 or $1,000,000 with no annual increase. That would leave a 1.5 Million dollar home and $600,000 portfolio ($1,000,000 if no increase). I am not supporting buying a 1.4 million dollar SPIA but less may be feasible. Also if the insurance company can pay this amount out she should be able to get similar results on her own (not contractually guaranteed but still likely to meet that level) She may be able to fund a TIPS ladder for say 25 years for less?

So I would say that she can give her children at least $18,000 each ($54,000) this year.

Note: Since she is giving while alive she has a low need for inheritance

I am starting to think she can do this as well as $54k (gift) + $125k-$140k (expenses) - $38k (SS) = $141k-$156k

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

But if it can, then it seems like she should keep doing this calculation each year and give ~$54k or w/e math works out that keeps her at approx a 4% safe withdrawal against her end of year NW each year. Thoughts?

If you are including the house as part of the portfolio than you should include imputed rent as part of her expenses (and still accept that the various analyses done on safe withdrawal rates are typically limited to stock/bond portfolios and not stock/bond/undiversified residential real estate holding portfolios).

[jeffyscott]

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

What happens if all the money is spent and all that's left is the house and SS income?

I guess I'd look at what all my money is being spent on and then decide whether I would prefer to continue to buy everything that I'm buying or give some money away. If I felt safe spending 4% of the portfolio, then whenever actual spending is less than that, I could give the difference away.

[delamer]

She could purchase a $84,000 SPIA with a 3% living increase annually for approximately $1,400,000 or $1,000,000 with no annual increase. That would leave a 1.5 Million dollar home and $600,000 portfolio ($1,000,000 if no increase). I am not supporting buying a 1.4 million dollar SPIA but less may be feasible. Also if the insurance company can pay this amount out she should be able to get similar results on her own (not contractually guaranteed but still likely to meet that level) She may be able to fund a TIPS ladder for say 25 years for less?

So I would say that she can give her children at least $18,000 each ($54,000) this year.

Note: Since she is giving while alive she has a low need for inheritance

I am starting to think she can do this as well as $54k (gift) + $125k-$140k (expenses) - $38k (SS) = $141k-$156k

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

But if it can, then it seems like she should keep doing this calculation each year and give ~$54k or w/e math works out that keeps her at approx a 4% safe withdrawal against her end of year NW each year. Thoughts?

To ge conservative, I would set aside the house value and consider it as her long-term care policy.

That leaves her liquid portfolio and her Social Security for current expenses. Say she gifts each child $100,000 (probably best done by gifting shares and letting the child pay the taxes when they sell) on a one-time basis. That essentially reduces her spendable income by $12,000 to $15,000 a year, based on a safe withdrawal rate. Is she willing to do that?

If she wants to be less conservative, she could add $300,000 from her home equity to her “liquid” assets (in paper) and reserve $1 million for long-term care. That gives her a little more flexibility and maybe she doesn’t reduce her spending.

But to consider the all the home equity as liquid is too risky, for a variety of reasons.

[WhatsUpB]

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

What happens if all the money is spent and all that's left is the house and SS income?

I guess I'd look at what all my money is being spent on and then decide whether I would prefer to continue to buy everything that I'm buying or give some money away. If I felt safe spending 4% of the portfolio, then whenever actual spending is less than that, I could give the difference away.

When we factor for the $38k in Social Security she is pulling out $85-$100k a year which @ 4% requires $2.125M-$2.5M. She has 2.07M today which is means she is pulling approx 4.5-5% out on average. While anything is possible, high unknown medical bills, etc, do we really feel that money is truly at risk of going to zero between ages 70 and 90. Going down maybe but zero?

Maybe I have grown to aggressive to this forum but to think 2.07M is going to run out pulling 4-5% a year seems crazy to me.

[WhatsUpB]

She could purchase a $84,000 SPIA with a 3% living increase annually for approximately $1,400,000 or $1,000,000 with no annual increase. That would leave a 1.5 Million dollar home and $600,000 portfolio ($1,000,000 if no increase). I am not supporting buying a 1.4 million dollar SPIA but less may be feasible. Also if the insurance company can pay this amount out she should be able to get similar results on her own (not contractually guaranteed but still likely to meet that level) She may be able to fund a TIPS ladder for say 25 years for less?

So I would say that she can give her children at least $18,000 each ($54,000) this year.

Note: Since she is giving while alive she has a low need for inheritance

I am starting to think she can do this as well as $54k (gift) + $125k-$140k (expenses) - $38k (SS) = $141k-$156k

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

But if it can, then it seems like she should keep doing this calculation each year and give ~$54k or w/e math works out that keeps her at approx a 4% safe withdrawal against her end of year NW each year. Thoughts?

To ge conservative, I would set aside the house value and consider it as her long-term care policy.

That leaves her liquid portfolio and her Social Security for current expenses. Say she gifts each child $100,000 (probably best done by gifting shares and letting the child pay the taxes when they sell) on a one-time basis. That essentially reduces her spendable income by $12,000 to $15,000 a year, based on a safe withdrawal rate. Is she willing to do that?

If she wants to be less conservative, she could add $300,000 from her home equity to her “liquid” assets (in paper) and reserve $1 million for long-term care. That gives her a little more flexibility and maybe she doesn’t reduce her spending.

But to consider the all the home equity as liquid is too risky, for a variety of reasons.

This makes alot of sense to me. Its a middle ground between the one extreme conservative take that she is somehow at risk of running out of money and/or unknown medical bills prevent any thought of giving anything away. And the other of give away too much and dealing with the consequences like having to sell house later.

I think isolating 1M of the home equity as the long term care insurance makes sense and is the spirit of what many have referenced and plays nicely with the idea of not counting the house in all this what % can be given away. Take excess home value above $1m and include in safe withdrawal calculations to get to what is reasonable to give away in a given year.

Still leave the open question could she go big with say one 3x $100k ($300k) to start or she really should just do the math on this house minus one million logic and only ever give away the excess each year.

[Dottie57]

She could purchase a $84,000 SPIA with a 3% living increase annually for approximately $1,400,000 or $1,000,000 with no annual increase. That would leave a 1.5 Million dollar home and $600,000 portfolio ($1,000,000 if no increase). I am not supporting buying a 1.4 million dollar SPIA but less may be feasible. Also if the insurance company can pay this amount out she should be able to get similar results on her own (not contractually guaranteed but still likely to meet that level) She may be able to fund a TIPS ladder for say 25 years for less?

So I would say that she can give her children at least $18,000 each ($54,000) this year.

Note: Since she is giving while alive she has a low need for inheritance

I am starting to think she can do this as well as $54k (gift) + $125k-$140k (expenses) - $38k (SS) = $141k-$156k

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

But if it can, then it seems like she should keep doing this calculation each year and give ~$54k or w/e math works out that keeps her at approx a 4% safe withdrawal against her end of year NW each year. Thoughts?

I don’t think there is much support here for mom giving away money at this point. The house is where she lives. It is not a cash bucket to be used.

[Dottie57]

$141k at 4% requires $3,525,000 which just so happens to be her nestegg WITH the house factored in. So again the question turns to can the house be considered in the final stages of your life when pulling money out.

What happens if all the money is spent and all that's left is the house and SS income?

I guess I'd look at what all my money is being spent on and then decide whether I would prefer to continue to buy everything that I'm buying or give some money away. If I felt safe spending 4% of the portfolio, then whenever actual spending is less than that, I could give the difference away.

When we factor for the $38k in Social Security she is pulling out $85-$100k a year which @ 4% requires $2.125M-$2.5M. She has 2.07M today which is means she is pulling approx 4.5-5% out on average. While anything is possible, high unknown medical bills, etc, do we really feel that money is truly at risk of going to zero between ages 70 and 90. Going down maybe but zero?

Maybe I have grown to aggressive to this forum but to think 2.07M is going to run out pulling 4-5% a year seems crazy to me.

Yes it could be used up. Especially with recessions/ bad markets that are long.

[jeffyscott]

Maybe I have grown to aggressive to this forum but to think 2.07M is going to run out pulling 4-5% a year seems crazy to me.

Sure odds always going to be that spending at a safe withdrawal rate means that you leave a lot. You're planning for the worst case, but the worst doesn't usually happen.

A single person that apparently needs to spend up to $140K per on themselves seems crazy to me. So giving away 10% of assets at the risk of potentially having to scrape by on $100K per year or something like that, should there be a long period of low returns, doesn't seem like a real problem to me. But then my spouse and I might spend $4000 per month excluding taxes, once we're both on Medicare, so not sure that this works for the person in question.

[TomatoTomahto]

Maybe I have grown to aggressive to this forum but to think 2.07M is going to run out pulling 4-5% a year seems crazy to me.

Maybe I’ve grown too conservative. We give gifts to the kids every year, and I’ve told them that I would give as much advance warning as possible if we have to stop gifting.

I don’t anticipate having to cease the gifts, but no way would I give them gifts if we had a 4-5% draw every year just to keep afloat. Markets do go down you know.

[Point]

Even selling the house is a question mark. She's in CA, there's capital gains tax both federal and state. What is the cost basis for the house? She's probably eligible for 250K not being taxed. There will be a gain, so the effective net worth of the house is significantly less than what's posed by OP. Then, she would what - move to a rental? Buy another abode? What effect on property tax would there be? She would no doubt have significantly higher property tax if she has held the house for some time. If she doesn't have an LTC policy, then she'll be self supporting for any assisted living. If she falls through her finances, there could even be a clawback for the funds she's recently given away. So, on paper it sounds like she's floating in money, but she's in a safe withdrawal rate right now, she covers her house maintenance and repair expenses presumably. And, she has a long runway to go with expected lifespan, 16 or more years. So, giving money way in any significant manner is probably not in her best interest.

[steadyosmosis]

Maybe I have grown to aggressive to this forum but to think 2.07M is going to run out pulling 4-5% a year seems crazy to me.

Sure odds always going to be that spending at a safe withdrawal rate means that you leave a lot. You're planning for the worst case, but the worst doesn't usually happen.

Correct.
Rarely is a reserve parachute needed, but I will not give mine away before I jump.

[aristotelian]

IMO you are spending about the limit of what is safe for your age. If your principal increases significantly above $2M, or you age 10 years without dipping in to your principal, I'd say you could start gifting.

[tibbitts]

I would only give at most modest gifts each year, certainly not exceeding the reporting limit. There just isn't enough money here unless there's more information (very limited likely lifespan, for example) we don't know.

[retired@50]

She might incur significant medical costs later in life. Assisted living, board & care home, etc. are all still possibilities aren't they?

I'd actually not expect that to exceed the current spending of $125-140K.

So, are you saying that you expect all her current spending to stop once she winds up in an assisted living facility or a board & care home?

I'm curious as to what she's doing with the $10K to $11k each month if it's not on a house payment, or medical expenses?

At this point, we're just guessing since we're not getting input from the 70 year old herself.

Regards,

[Peter Foley]

I've not seen any information regarding her tax situation.

Does she regularly give to charities and is that part of her annual expenses? She will soon be able to make qualified charitable distributions from her IRA.

Do some of her brokerage holdings have high capital gains? Under certain circumstances gifting a bit here might make sense. She can donate shares to children, not dollars. My concern is that her modified adjusted gross income is in a range where she is paying higher Medicare B premiums.

Some gifting at this point might make sense before RMDs kick in.

[Jack FFR1846]

I'm 67. DW is 63. $4.8M in liquid investments. Yes, the house and 4 cars are paid for. 2 twenty something sons. Retired 15 months ago. No social security till I hit 70 and I'll take in $50k a year from that. DW will take in about $20k when I hit 70. We spend, including huge Roth conversions with taxes $100k a year now. We just this year gave both kids money/goods. Older son, to pay of car loans. Note, my 88 year old mom gave him money to pay off student loans. Other son is getting one of our cars worth about $19k kbb. Going forward, we plan to give dividend paying ETF shares to both kids for birthdays and Christmas. We're starting that with one who just had his birthday. Gotta get rid of that evil dividend income.

Would you have to have what we do to begin giving money? Probably not. I'd say half of what we have as it's a single person, however that single person is spending $30-$40k more a year than we do. If the single person sells the house and moves to a lower cost home, then they can count the house. Our house is probably just south of a million but so what? We have zero plans to ever move, so it could be worth $12 and all the same.

[WhatsUpB]

She might incur significant medical costs later in life. Assisted living, board & care home, etc. are all still possibilities aren't they?

I'd actually not expect that to exceed the current spending of $125-140K.

So, are you saying that you expect all her current spending to stop once she winds up in an assisted living facility or a board & care home?

I'm curious as to what she's doing with the $10K to $11k each month if it's not on a house payment, or medical expenses?

At this point, we're just guessing since we're not getting input from the 70 year old herself.

Regards,

She is in good health on medicare, some is taxes+insurance, some is trips, some actually is small/medium cash gifts to the kids and grand kids (ironically she actually has been giving but i have been trying to simplify to not distract), and rest is just her life. She just wondered if she could do 3 large gifts (i.e. 100k each per kid) this year.

It seems at best she could do the exclusion this year to each kid $18k x3. Doing that this year keeps her above $2M. $2M+ in Taxable+IRA at minimum which provides $80k at 4% + $38K in social security. If at end of each year she is still over $2M do $18k x3 gifts. Maybe one day her investments get to 2.5M or 3M and could do three 100k gifts in a few years, but then the other classic problem remains all parents with wealth are presented...

The kids (in this case all 3) are in their 30s and starting families each with 1 or 2 kids and hoping to buy houses in nice school districts etc in the next 5 years. So there is this classic problem of wanting to help now with lager amounts (100k each would do it) so she can live to see this happen. But then of course those large gifts pull her below $2M and violate the 4% rule (ignoring the house).

[MathWizard]

My wife and I are in a better position than this mother, though slightly younger. I would not give away $300K at this point.
We are a safety net for our kids. In dire circumstances,
they will never be homeless or hungry. Not everyone has such a safety net.

She is also paying federal tax as a single, as well as
California state income tax, and she is
taxed on 85% of her SS.

[WhatsUpB]

Maybe this can help as I just looked up a few numbers. The last two years she spent including taxes, insurance, medical, etc.. 83k in 2023 and 80k in 2024. Then she gave family 40k in 2023 and 45K in 2024.

So there you go, her expenses are actually more in the $80k or so range per year all in of which social security now pays 38k of that so if spending holds she will actually need 42k pre tax for her lifestyle from the 2.07M.

This thread made me go back and break out her gifts which I hasnt to arrive at the $125k pre tax number i have been quoting to kick off this thread when really as per above its ~$80K expenses and $40k in gifts as it stands now.

So maybe with this new info things change? I dont know. But I do know I am so thankful for everyones comments and discussion. Love this place.

If she needs $80k a year could she take this 2.07M down to 1.77M and be ok to get each kid 100k this year? Or no that extra 300k is the breaking point of no longer being very fincainally safe and she should at most just do $18k x3 every year from here on out?

[delamer]

Sure, the fact that 1/3 of her spending already is gifts makes a difference. Her personal expenses are much lower as a withdrawal rate than it appeared. (Although I’m not clear if the $85,000 or so includes income taxes.)

But the gifting is much less a threat in terms of her portfolio survival based on the new information. I’m assuming the other, smaller annual gifting will stop once each child gets $100,000?

But if she is going to gift cash from her taxable account then she needs to sell the shares in a tax efficient way, especially if $300,000 is the goal. She doesn’t want to subject herself to NIIT (investment tax) by selling too much in one year, for example.

There’s a very useful federal tax calculator at dinkytown where you can input various capital gains scenarios and see how they change her taxes.

Gifting the $300,000 over 2 or 3 years is very likely to save on taxes.

And as mentioned earlier, she can transfer shares as gifts and let the giftees pay the taxes when they sell.

[Peter Foley]

Just to make sure you understand the basic rules. $18k can be given per person. So $36K to a couple. There is no federal tax on gifts exceeding that amount when given, only paperwork. Larger amounts do count against the federal estate tax when one passes, but at current levels that is not an issue in this case.

[HairyReasoner]

Common scenario for the forum but one worth continuing to talk through. All framed around safe withdrawal rates and risk I think.

Curious if anyone has a good framework to apply to make things more automatic when parents have "enough" money to give some to kids early (before death and inheritance). There are emotional factors (including the joy of seeing money used before their death) to consider but for this post I am curious simply on people's opinion of the math and investment philosophy on this only please...

70 year old, Single Mother of 3
$38k a year in Social Security
$2.07M in a 50/50 index portfolio (475k IRA, 1.6M taxable) - 58% of NW
$1.5M House paid off in Greater LA - 42% of NW
Thus, net worth of $3.575M

Spends $125k-140k a year on things. So with SS she needs to pull out approx. $85-100k a year from investments for living expenses. Note again please this is a 70 year old with a paid off house.

Please ignore the emotional side, curious on the math and risk side of the house no pun intended. Also, yes I aware of gift tax laws and needing to file paperwork if gifts exceed $18 and each family member can get $18k with no paperwork in 2024. Also also, there will be 15% capital gains tax on getting this money out to give which is acceptable cost given she is not 90 imo.

How much could she afford at this moment to give each of the 3 kids? If not now, when in the future? How much? Lump sum or something per year?

A "safe" 4% on the 2.07M would $82,800 per year. 5% being $103.5k which is a little less "safe" but seems fine.

So if we consider just the liquid investments (IRA+Taxable). I think we would say she is not in the position to give money to each kid, right?

But now take into account the $1.5M house. Consider she is 70, and before we know it 80, etc... this asset is one that I think can and should be considered in the math on what is safe to withdraw from her NW to give to kids now (versus after death).

Said another way with a $3,575,000 NW it seems she could give the kids $100k each to start? More? Less? Other ways to do this and think about it?

Bringing emotions into it at the end for one paragraph, ideally this would help each kid buy a house but it would be up to them if they want to do that with the money, no strings attached or judgement. An extra $100k post tax would very much help each kids reach that goal soon. $200k each more so of course. Also, the joy of just seeing the money in the kids hands before death versus being gone.

What are people thoughts and advice please!

Make sure she still has enough after the gifts to fund a significant nursing home stay, if that will possibly be needed within 5 years--ideally without having to sell the house. If the gifting leaves her in a position she would not be able to afford at least 5 years or so in a nursing home, and Medicaid is needed within 5 years, the gifts will be a problem for the look back period. Mom might be ineligible for medicaid for a time due to the gifts.

[123]

She is not in danger of exceeding the federal estate tax-free exempt amount in the foreseeable future.

At age 70 she may have 30 more years ahead of her, some of which may be in assisted living or nursing home type placement.

She undoubtedly has worked hard to accumulate what she has, perhaps some was accumulated while a spouse worked and she raised the family.

Her expenses are significantly greater than her income.

This is no time for her to give away any of her financial safety net.

Rather than expecting financial gifts from her the kids should be giving to her to support her current and future needs.

[mrsbetsy]

What have these 3 offspring been doing with the 40K/year combined she's been gifting them? Perhaps they should consider setting up a separate fund to save for a house on their own. Hopefully, they haven't been using it to supplement a larger lifestyle than they can actually afford. She can continue doing this, but no way can she just give 100K x 3 on that portfolio.

I would not count the house. One earthquake or one fire and the market value for that house isn't going to be the same. (Fellow Californian here) We don't count the house.

We also cash flow gifts to our kids and I'm sure they would love a lump sum, but they really like the idea that they don't have to worry about us.

Continue small gifts she's been doing and let the adult children step up their saving and in a few years, they will have enough to buy a house themselves.

[SuzBanyan]

What have these 3 offspring been doing with the 40K/year combined she's been gifting them? Perhaps they should consider setting up a separate fund to save for a house on their own. Hopefully, they haven't been using it to supplement a larger lifestyle than they can actually afford. She can continue doing this, but no way can she just give 100K x 3 on that portfolio.

I would not count the house. One earthquake or one fire and the market value for that house isn't going to be the same. (Fellow Californian here) We don't count the house.

We also cash flow gifts to our kids and I'm sure they would love a lump sum, but they really like the idea that they don't have to worry about us.

Continue small gifts she's been doing and let the adult children step up their saving and in a few years, they will have enough to buy a house themselves.

Don’t count the house unless she is actively looking to downsize AND downsizing will clearly add to her nest egg after taxes. My 95 YO Dad is still living in paid off family home. I, on the other hand, recently downsized but due to a move to a more expensive area to be near family, the nest egg didn’t go up much.

[jeffyscott]

Maybe this can help as I just looked up a few numbers. The last two years she spent including taxes, insurance, medical, etc.. 83k in 2023 and 80k in 2024. Then she gave family 40k in 2023 and 45K in 2024.

So there you go, her expenses are actually more in the $80k or so range per year all in of which social security now pays 38k of that so if spending holds she will actually need 42k pre tax for her lifestyle from the 2.07M.

This thread made me go back and break out her gifts which I hasnt to arrive at the $125k pre tax number i have been quoting to kick off this thread when really as per above its ~$80K expenses and $40k in gifts as it stands now.

So maybe with this new info things change? I dont know. But I do know I am so thankful for everyones comments and discussion. Love this place.

If she needs $80k a year could she take this 2.07M down to 1.77M and be ok to get each kid 100k this year? Or no that extra 300k is the breaking point of no longer being very fincainally safe and she should at most just do $18k x3 every year from here on out?

It changes if the one time $300K means the $40K per year in gifts is terminated, reduced, or suspended.

If a 4% withdrawal rate is considered safe, only about $1 million would be needed to supply the $40K per year. Or looking at it the other way, the $40K would only be about a 2.3% withdrawal rate after giving away the $300K.

[WhatsUpB]

Maybe this can help as I just looked up a few numbers. The last two years she spent including taxes, insurance, medical, etc.. 83k in 2023 and 80k in 2024. Then she gave family 40k in 2023 and 45K in 2024.

So there you go, her expenses are actually more in the $80k or so range per year all in of which social security now pays 38k of that so if spending holds she will actually need 42k pre tax for her lifestyle from the 2.07M.

This thread made me go back and break out her gifts which I hasnt to arrive at the $125k pre tax number i have been quoting to kick off this thread when really as per above its ~$80K expenses and $40k in gifts as it stands now.

So maybe with this new info things change? I dont know. But I do know I am so thankful for everyones comments and discussion. Love this place.

If she needs $80k a year could she take this 2.07M down to 1.77M and be ok to get each kid 100k this year? Or no that extra 300k is the breaking point of no longer being very fincainally safe and she should at most just do $18k x3 every year from here on out?

It changes if the one time $300K means the $40K per year in gifts is terminated, reduced, or suspended.

If a 4% withdrawal rate is considered safe, only about $1 million would be needed to supply the $40K per year. Or looking at it the other way, the $40K would only be about a 2.3% withdrawal rate after giving away the $300K.

It would be one time and she could spread it out between this year, next, and year after to minimize tax consequences. She would want to give cash so would handle the 15% cap gains tax so I guess that is another $45k expense over the 3 years to get the 100k given out to each.

Someone else asked the $80k in expenses includes taxes. It is every dollar she spent on the year.

[dogagility]

One way to math this out may be to use a retirement withdrawal calculator like TPAWPlanner. https://tpawplanner.com

Using this planner and not considering her home equity and living until age 95, the planner suggests withdrawal of 10,207 from her portfolio this month. This is in addition to the 3,167 she receives from SS. Total is 13,374. These numbers will vary a bit depending upon some of the planner inputs such as the spending tilt.

Her monthly living expenses are between 10,417 and 11,667 (from your first post).

In theory, she could gift the excess money (13,374 - monthly living spend). The amount gifted would vary over time depending upon how her portfolio performs.

If she sells her home at age 80 (for example) for 1,500,000 and you consider this as a "windfall" added to her portfolio, then the TPAWPlanner tool recommends a portfolio withdrawal this month of 18,649.

[delamer]

Common scenario for the forum but one worth continuing to talk through. All framed around safe withdrawal rates and risk I think.

Curious if anyone has a good framework to apply to make things more automatic when parents have "enough" money to give some to kids early (before death and inheritance). There are emotional factors (including the joy of seeing money used before their death) to consider but for this post I am curious simply on people's opinion of the math and investment philosophy on this only please...

70 year old, Single Mother of 3
$38k a year in Social Security
$2.07M in a 50/50 index portfolio (475k IRA, 1.6M taxable) - 58% of NW
$1.5M House paid off in Greater LA - 42% of NW
Thus, net worth of $3.575M

Spends $125k-140k a year on things. So with SS she needs to pull out approx. $85-100k a year from investments for living expenses. Note again please this is a 70 year old with a paid off house.

Please ignore the emotional side, curious on the math and risk side of the house no pun intended. Also, yes I aware of gift tax laws and needing to file paperwork if gifts exceed $18 and each family member can get $18k with no paperwork in 2024. Also also, there will be 15% capital gains tax on getting this money out to give which is acceptable cost given she is not 90 imo.

How much could she afford at this moment to give each of the 3 kids? If not now, when in the future? How much? Lump sum or something per year?

A "safe" 4% on the 2.07M would $82,800 per year. 5% being $103.5k which is a little less "safe" but seems fine.

So if we consider just the liquid investments (IRA+Taxable). I think we would say she is not in the position to give money to each kid, right?

But now take into account the $1.5M house. Consider she is 70, and before we know it 80, etc... this asset is one that I think can and should be considered in the math on what is safe to withdraw from her NW to give to kids now (versus after death).

Said another way with a $3,575,000 NW it seems she could give the kids $100k each to start? More? Less? Other ways to do this and think about it?

Bringing emotions into it at the end for one paragraph, ideally this would help each kid buy a house but it would be up to them if they want to do that with the money, no strings attached or judgement. An extra $100k post tax would very much help each kids reach that goal soon. $200k each more so of course. Also, the joy of just seeing the money in the kids hands before death versus being gone.

What are people thoughts and advice please!

Make sure she still has enough after the gifts to fund a significant nursing home stay, if that will possibly be needed within 5 years--ideally without having to sell the house. If the gifting leaves her in a position she would not be able to afford at least 5 years or so in a nursing home, and Medicaid is needed within 5 years, the gifts will be a problem for the look back period. Mom might be ineligible for medicaid for a time due to the gifts.

If she has a nursing home/assisted living stay long enough that it would significantly spend down her liquid assets, then it’s highly unlikely that she would be returning to her home,

For a single person, home equity is the ultimate LTC insurance.

[delamer]

She is not in danger of exceeding the federal estate tax-free exempt amount in the foreseeable future.

At age 70 she may have 30 more years ahead of her, some of which may be in assisted living or nursing home type placement.

She undoubtedly has worked hard to accumulate what she has, perhaps some was accumulated while a spouse worked and she raised the family.

Her expenses are significantly greater than her income.

This is no time for her to give away any of her financial safety net.

Rather than expecting financial gifts from her the kids should be giving to her to support her current and future needs.

This woman has a net worth of $3.6 million and Social Security benefits of $38,000/year.

Her personal expenses amount to about $85,000/year.

In what world should her children be giving her money?

[Believeland]

Most the people in the forum speak from a midwestern cost point so I think that tends to taint how we value living on the coast where things cost 35% more. I may be wrong but the $1.5 million dollar house noted would be a mansion / very luxury living here. In LA, I think this is basically just a very nice house. Also, most people seem overly cautious and forget the money is to provide comfort, joy and security. I think as long as the gifting and the tax implications from the portfolio aren't done recklessly, adequate funds to do so exist. On the plus side you have the opposite problem most of us have. A lot in your brokerage but not much in your IRA. Having said that I see the following red flags that should be considered.

Are your mom's expenses really $80k per year before gifting? In Midwestern $'s that's $60K which isn't a ton(others may disagree). Are you fully considering the tax load on ALL spending annually? Annual taxes on SS, dividends, ordinary income, IRMA potentially as well? You need to add in all these costs to determine the actually burn rate. If you're just taking raw expenses, you're understating the portfolio consumption and really may burning thru $200K per year which obviously is not sustainable.

What exposure does your mom have for capital expenditures in the next 5-10 years? Significant dental work planned, remodeling projects, new roof, fully paid off car that she intends to keep a long time? Does she have things like mowing, house keeping that she pays for now or will have to in the future?

What type of longevity runs in the family? Does she likely have 10-20 years or does she come from a family that lives till 100?

In the Midwest, homes are seen as payment of last resort for LTC. Its easy for most as the house can be sold without capital gains expenses with the $500K exception. Is she sitting on a large future CG expense(and growing) at sale time if you don't figure out another alternative to extract the money without tax expense. While I see where are you going with considering the home value, it may not be as much as you think when you consider taxes, LTC, etc.

You'll want to determine what likely LTC for an acceptable for her? I think the value stated for CA is low based on what it is in the midwest. I wouldn't consider putting MIL in a LTC at the average LTC expense for Kansas City. The actual expense would be 2X that. Remember also however, generally once you get in self pay LTC, when you burn thru your $, the nursing home typically will provide a Medicaid bed so you'll continue to get the same care if you run out of money.

If you don't already, I'd put all the slow growing assets in the TIRA to give you more control over taxes. I've inferred maybe incorrectly that you're mom may not be currently optimizing withdraws from the portfolio in consideration of taxes. Maybe some opportunity there not just for this large expense. You still have a lot of runway left to manage this. You don't want to foolishly be paying multiple levels of IRMA when you can manage this by deciding what specific lots to sell.

In regard to the gift of $300K if you broke this into this year, next year, and January of 26, she'd really only be gifting a total of $180K more than she is now but you'd get it all quickly. That could help on the taxes or you could rebalance slow growing over to the TIRA and pull $200K out of the brokerage account without having to sell anything, then come up with the other. The other $100K could come out of the brokerage account over the 14 month period without a big tax hit.

Is the goal to just get the money quickly so a house can be bought? I hear stories about people in CA having roommates just to afford a house. I wouldn't want any part of that in my 30's especially with a family, so I get the need to have a large initial amount of money to prevent this. Is a continuing $40K per year expected after this expected by the siblings? Are you each prepared to forgo this if mom needs the money?

Long story short, just think this thing thru so you don't burn mom. I think you're trying to go about it the right way just be careful. If I were her if I could I'd like you to have the money now while I'm alive. It will be more meaningful than later. For sure it would bring her joy.

[TomatoTomahto]

We are more comfortable than OP’s Mom. Nevertheless, we gift the 4 kids the annual gift limit ($36k) each and have no plans to gift more. We intend to continue to do this until we die, at which point they’ll have an inheritance with basis step-up.

The kids know that we won’t be knocking on their doors because we have overspent. They also know that, if stuff hits the fan, we have a safety net available for them.

However, we don’t give larger lump sums for home purchases. One of the kids recently bought her first house, presumably with some savings of the previous gifts, but I don’t ask.