"All that you can take with you is that which you've given away" -Peter Bailey
Lending or giving money to family and friends seems to be an under-discussed topic in financial planning. Over the years, many clients have navigated this issue with varying outcomes. Before addressing the question of whether you should do it, first ask if you can do it.
This career has taught me a lot that wasn't covered in finance degree courses or CFP exam prep. One key realization is that anyone who achieves moderate to high financial success will likely be asked for money by a friend or family member at some point.
A personal anecdote: A very long time ago my wife and I once asked my father to take out a home equity loan at a low interest rate to help pay off our high-interest student loan debt. We paid him back in a very short time and saved A LOT of interest, but he took a significant financial risk without any reward.
If we had skipped town and moved to Bermuda he would have faced a massive loss and certainly caused a family rift.
Key Questions to Consider Before Lending Money:
"I am a socialist with my family, a democrat with my friends, and a republican with my money" -Unknown
One thing I have noticed over time, is that as client’s age and their wealth continues to accumulate beyond what they think they can reasonably spend, they tend to open up to the idea of making more monetary gifts to family while alive. The logic being “I’d rather give the money now while I’m here than when I am dead and gone”, and of course no one wants their death to be something that someone is looking forward to from a financial perspective.
Giving during your lifetime allows you to see the benefit of your gifts (but if you believe in the afterlife, I think you can still watch from up there).
I have this dream my daughter in-law kills me for the money. She thinks I left them in the will. The family gathers 'round and reads it and then someone screams out "She's laughing up at us from hell" -Taylor Swift, Anti-Hero
I can get onboard with the logic of seeing the impact of your gifts, but we should still look at some of the potential pros and cons of this. Getting married, being poor, and struggling is a right of financial passage in my opinion and provides a good foundation for long-term prudent financial management.
My wife and I often reminisce about the early days of our marital bliss, where our date nights were often at Culvers, we had a chronic roof leak, and a backed up sewer pipe in the basement. Those were the days!
"Difficult roads lead to beautiful destinations" -Zig Ziglar
So what are some downsides to gifting an inheritance to children while still living?
1. Lack of motivation: If children know they have a significant financial safety net, they might be less motivated to make the most of their own careers. This could come back to bite them later in life. .
"I will give my kids enough money to where they can do anything, but not so much to where they can do nothing." -Warren Buffett
2 .Financial immaturity and risk of dependency: There is a chance that the upfront inheritance is not managed prudently, but squandered, further there could be a dependency created if you are making gifts regularly. This can cause problems, as children may not be able to figure out how to run a household on their own income and one day the gifts will stop.
3. You're overestimating your financial well being: You are making financial gifts because you think you can never spend what you have, but you may want to consult with a financial planner on that. Many things today cost at least 30% more than they did 4 years ago. What if we see another 4 years like that? What if your end of life care consists of multiple years in a skilled nursing facility? Do you really have “enough”?
4. You’re not doing it equally: I’ve seen this. An inheritance is gifted in advance to one child who is in need, but the other kids don’t get anything at that time because they are doing fine. Unless the parents properly redo their estate documents/beneficiary designations, this probably will not end well as one child is getting an even share of the pie.
Benefits of Gifting Inheritance While Alive:
Deciding whether to lend or give money to friends and family is complex and deeply personal. It involves balancing the potential benefits of providing support and witnessing the positive impact on loved ones against the risks of financial mismanagement and strained relationships. Carefully consider your financial situation, the recipient's financial habits, and the potential long-term effects on both your relationship and their independence.
Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Consult with a financial advisor before implementing any strategies.
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