One Big Lesson About Giving Money to Your Kids

One day you receive money from your very alive parents. Are they gifting it to you? Are they gifting it to you and your spouse? Are they lending it to you? Chances are it’s not that clear. And if it does seem clear to you, is it equally and similarly clear to everyone involved? And is it documented?

It’s not unusual for parents to help out with a down payment on a home, or to do an occasional bail-out of debts that have run too high, or to provide money for post-secondary education savings for the grandchildren, or simply provide a pre-inheritance given to their children with “warm hands”. Parents do this kind of thing. It is generally done with love, a desire to be supportive and the goal of helping their children thrive.

But when a divorce occurs, what happens then?

All of a sudden the specifics of who exactly that money was given to and on what terms, can become a significant point of contention. And what was done with the money when it was received can complicate things even further.

There are four basic questions that need to be asked in these situations:

1. Was the money a loan or was it a gift?
2. If it was a gift, was it made to one of you or both of you?
3. If it was a gift to just one of you, what did you do with the money?
4. Can you prove it?

That last one is usually the contention point. In the absence of documentation attached to the sum of money, which more often than not does not exist, what exactly was the understanding when the money exchanged hands?

Generally speaking the quick answer to this is that if it was a loan, and was clearly documented as such, then it’s a repayable loan like any other loan and needs to be factored into your calculations as if it was owed to the bank.

After that it all becomes a little muddy. Does a check written to just one of you mean it was given to just one of you? Does a card that accompanied the check and is addressed to both of you mean that it was intended for both of you? Did anyone give any thought to what would happen in the event of a divorce? Are Mom and Dad now demanding their money back, where repaying it had never been previously discussed?

If you cannot come to a reasonable agreement on what to do about sums such as these then a detailed legal evaluation of your situation based on the laws in your jurisdiction is likely a wise move, at least as a starting point. Knowing the likely legal treatment gives you both a starting point from which to add in moral and equitability considerations that you both might agree on. These considerations are unlikely to be taken into account in a court based situation but can certainly be discussed and negotiated around a mediation table.

But here’s the biggest point I want to make about parents giving money to their adult children. Assuming you have children of your own, one day you might want to give them a chunk of money. Be smart about it!

Before your kids are adults, before you have extra funds to give them, before they have partners who you love (or dislike), give some thought to how you would like to deal with this so that whatever happens, you’ve provided money to your kids in a manner that included the awareness of what might happen to that money in the long run.

In our case, we have gifted money to our children in the $4,000 range. We gave it to them, not them and their partner. We made that clear on the documentation that went along with the gift. And, for those who asked, we explained how their choices around what they did with the money would impact them in the event their current relationship did not survive. And then we let go of any need to control what happened to this money, knowing that we were no longer responsible for protecting it on behalf of our children and fully aware that it could end up in the hands of an ex-son-or-daughter-in-law and being entirely fine with that.

However, we have also agreed that when we are in a position (and have the desire) to give our children larger sums of money, those sums will come in the form of a loan. An interest free, payable on demand loan that will be papered and signed by us and our individual children, and possibly their partner at the time. And we will seek legal advice to make sure that what we do will have the intended result.

This is both a philosophical and a legal issue. Make sure you cover it all off so that you don’t inadvertently create issues for your children or resentments for yourself.