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Should I Pay Off My Child's Mortgage?

Dec 11, 2015 7:00:00 AM
Author: Scott Hanson

Retirement experts Scott Hanson and Pat McClain, hosts of Money Matters financial topic radio show, advise a caller about complex estate planning issues.



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Read Full Audio Transcript:

Scott Hanson: And John, you're with Hanson McClain's Money Matters.

John: Hey, how you doing? I'll try to be direct. I'm 62, I've been retired for 2 years. Because of the financial situations I am curious about trying to pay off my daughter's mortgage principal and I'm wondering if that opens me up to legal problems. I would say her principal balance is about $130,000 to $135,000.

Pat McClain: Is she married?

John: She is married.

Pat McClain: Okay.

John: And I'm just wondering, is that something that I could do? Does that, again, open up to problems? Or is that into the gifting? I know there's something like $14,000 a year. Does that play into it?

Pat McClain: And you can afford this?

John: At this point, yes.

Pat McClain: Well, that's what scares me. Is there a point in the future, where you wished you wouldn't have had to do it? That's the question, right? Do you have so much money that--

John: I don't want to sound that smug or anything like that.

Scott Hanson: Well, you might.

John: But like I said, I have no debt. And then I've got about $120,000 in an IRA and about another $100,000 in Money Market and not getting much interest there. Of the IRA that I have, it's on a ladder. I don't know if you've...It's called a ladder. So about a third of it, about $40,000, will be coming due in the next couple months.

Pat McClain: Okay, so you have it in a bond ladder.

Scott Hanson: A couple of things going on here.

Pat McClain: Or a CD ladder.

Scott Hanson: I'm glad we asked these questions. So the first thing, there's the gift tax and how much you can give to somebody in any one year, and this applies to your family as well. You're only allowed...Well, maybe allowed is a strong word...

Pat McClain: John, are you married?

John: I am married, yes.

Scott Hanson: Well, an individual can transfer to anyone else they would like, up to $14,000 per year, before there's any gift tax rules that come into play. Okay? So $14,000, you can give your daughter $14,000. Your wife can give your daughter $14,000. You can give your son-in-law $14,000. Heck, you can give me $14,000, if you want to, right? Anybody.

Pat McClain: It's not...it's the recipient, it's not how much you can give. So you could give 100 people $14,000.

Scott Hanson: Yes. If you wanted to. Without any gift tax. Once we go over that, we have that we can pass on, either during our lifetime or at our death, up to $5 million. That's the current estate tax limit. The exemption amount applies to both at death and while we're living. We can give up to $5 million--

Pat McClain: And the gift and the estate is the same, Scott?

Scott Hanson: Yes, that's correct. Up to $5 million before there's any tax consequences. So if you gave more than $14,000. You could give $14,000, your wife can give $14,000, there's $28,000. Anything above that is just going to reduce your $5 million and your wife has $5 million. So unless your estate's worth more...If your estate's close to $5 million, then there's some consideration. If you're so far off that …

Pat McClain: Then don't worry about it. So most people don't worry about it. Here's what you should worry about. That first thing you should worry about is, when you give this money to your daughter and she pays down the mortgage, you're co-mingling those assets as community property. So you're giving it to your son-in-law as well.

John: Correct.

Pat McClain: And if there's a problem in the marriage at some time, you would recognize that those dollars had a good chance of being community property, not individual property.

John: Gotcha.

Pat McClain: All right.

Scott Hanson: That's a consideration.

Pat McClain: It's a real consideration.

Scott Hanson: The second thing, let's say it's $135,000. You have $100,000 in the Money Market that--

Pat McClain: Which you could give to her easy.

Scott Hanson: But the other $35,000 is going to have to come out of your IRA.

John: Correct.

Pat McClain: Which means that, in order to get the other $35,000 out, you're probably going to have to take $50,000 out, pay taxes on it to give her the $35,000. From what you've told me...

Scott Hanson: Do you have a lot of other pension income?

John: I have pension income.

Scott Hanson: If the money in your IRA and the money in your Money Market was stolen tomorrow, let's just say, or you lost it in some bad bet, would it have any impact on your retirement?

John: Well, yeah. Like I said, I have pension income, and I have not been taking social security. I was debating whether to do that. When I turn 63, I could take social security.

Scott Hanson: Well, you can take it, now, too, for that matter.

Pat McClain: And does your daughter need the money? Would it improve their life significantly?

John: I wouldn't say that it would improve, no.

Pat McClain: Here's my view of it. You don't have enough money liquid, either in Money Markets or in IRAs to be giving significant amounts of money away.

Scott Hanson: That's what I think too.

Pat McClain: And if it's not dire for her. Plus, you're too young. If you were 79 or 80 or 85, but you're 62.

John: Correct.

Pat McClain: I appreciate the fact that you want to help her. I think it's a bad idea.

John: You think it's a bad idea.

Pat McClain: I think it's a bad idea.

John: Okay.

Pat McClain: I wouldn't do it.

Scott Hanson: I would agree with Pat.

John: I'll take your expertise.

Scott Hanson: Well, and your daughter, if there's some financial needs, you'd probably be better off, just as those needs arrive, try to help on those things. Or if it's the grand kids, to help with some of the... I think, from your own planning, you'd be better off doing that. Our concern is, if you do this, you've got some other issues down the road, medical issues, who knows what. And now, you don't have the cash for it.

John: Correct.

Pat McClain: Or you free up enough of her income, and then they go out and buy Corvettes, matching. Bright yellow, bright red.

John: Well, I wouldn't be happy with that.

Pat McClain: Well, it happens.

Scott Hanson: I doubt that, matching Corvettes. It happens. I don't know anyone who has matching Corvettes.

Pat McClain: Matching Corvettes. Bright yellow? Are they matching if they're different colors?

Scott Hanson: We've got to take a break. This is Hanson McClain’s Money Matters.