I almost feel guilty even disclosing this because it's so wonderful and I didn't do anything in particular to deserve it.
I would never bring it up in my "real" life of course, but since (almost) none of you know who I am, I will stick to my blog commitment to discuss all matters that pertain to getting, having, and sharing wealth - mainly as they apply to me, of course.
So here it is: my family gives me money. I'm not talking about the garden variety plane ticket home, $100 for "dinner," help with the rent money. I'm talking about estate planning, gift tax avoiding, maximum annual gift exclusion money.
Yeah, that's right, I'm technically one of those "spoiled" "rich kids" who has "had everything handed to them." Technically.
When parents give money to their kids, it illicits all sorts of negative connotation. Some arguably disgusting evidences of this include parents buying teenagers BMW's, parents paying $100K for Sweet 16 birthday parties, parents buying newlyweds entire homes, and 50 year old adults still suckling at the financial teat of their aging parents, guiltily considering the silver (and gold) lining of their parents' inevitable deaths.
I didn't (and won't) get any of that stuff. But the fact is that one of the realities of being wealthy is trying to figure out how to most effectively and efficiently share your wealth (preferably while sharing as little with Uncle Sam as possible).
People want to help their own families. It's human nature. It's the reason why babies survive after their 10th straight hour of crying. And it's also the reason why children of the wealthy are often spoiled.
The most common and basic way for wealthy people to share their wealth with family members - and totally tax free - is to take advantage of the annual Gift Exlusion granted by the IRS. Every year, there is a certain amount that a person can give to another person without incurring gift taxes (which exist to prevent people from avoiding death taxes by giving it all away before they die).
In 2008 the exclusion was $12,000 - in 2009 it's $13,000. That means that in 2008 my grandfather gave every one of his family members $12,000- and so did my grandmother. So I personally received $24,000, deposited without a word into my special account.
Most of my siblings and cousins (all of whom are younger than I) don't even know about these accounts. I found out about it when I went to college and demanded to know how it would be paid for. Even my parents don't usually know when or how or if such gifts are given each year.
The general rule is supposed to be that once a grandchild graduates from college, those funds are off limits for general living expenses - downpayments on homes and investments are a case by case basis I guess. Of course I was first to graduate and I happen to be a big personal finance nerd. So far the system hasn't been tested by any deadbeats or drug addicts.
Since college I have my special account to:
- Max my Roth IRA each of the years I've had income
- Put a 20% downpayment on a condo soon after college graduation
- Buy a car
- Put 20% downpayments on each of two rental properties.
I would say my parents and their siblings did as good a job as possible raising a non-spoiled, financially responsible generation despite their wealth. It helped that my parents and aunts and uncles grew up poor and live in areas where materialism is scarce.
The real test will be how my kids and neices and nephews turn out.
43 comments:
I've always wondered how you afforded your rental properties. You are definitely lucky (and I'm going to let myself be a little jealous =)), but you are also very responsible and you don't seem very spoiled from your blog. You are right the real test will be how the next generation does. A lot of that will be how you decide to raise them, so I have a feeling they will be smart with there money as well.
i don't have a silver spoon in my mouth so ill have to definitely work harder to get the down payment for my rental properties. Keep doing what you doing though.
Well, I have to admit I am envious. (Because my family? Basically did the opposite.) That said, hearing how your family's sensible generosity has helped you to create real financial security (and to build wealth for the long term) really inspires me to be able to do as well for my own children. (Okay, I probably won't be able to do it to the same extent, but I at LEAST want them to be able to go to college without crushing debt, and I work two jobs in order to save up the money to do that.)
Good job! I have always questioned why you invested in real estate when most people don't have a stock portfolio at your age. I believe there is less risk in stocks when you have say $100k instead of buying rental properties. However, with a large safety net there is a huge opportunity to take the risks you are!
By the way, I live vicariously through your landlording posts, crying and hand wringing when things go wrong. going OMG, I can't take it. I need a tums!
And I hope to one day provide for my children at least a fully paid for college education, nice wedding, car, and MAYBE a house DP!
So, Meg?
Would your parents (or maybe your grandparents?) like to adopt me? I would promise to keep my room clean and not bring strange boys home.
While you are wealthier than I am, I, too, have family help--not from my parents who are deceased but from my sister. She doesn't make the annual gifts that your grandparents do, but she is always available to bail me out if need be. That's one of the big differences between the truly poor and the middle/upper classes--no one to turn to in a financial emergency.
Grace you've brought up a tremendous point about help!
It's nice to see someone with a silver spoon not behaving like a complete idiot. I was the poor kid amongst rich friends growing up. After college, they all moved to NY or LA on the family dime, developed drug habits, and ended up in rehab or joining the army. funny how things workout...
of course there were the few (and far between) rich friends who ended up doing something significant doctors/lawyers/banking, but definitely in the minority of that group.
keep up the good work!!!
I figured you were dead wealthy :) That and LAL told me.
No one out of school can afford to be a landowner right away and be so far ahead as you have been.
I love that you're so smart with your money, even with it coming out your wazoo.. (to me anyway).
I could never turn to my family for help, which I guess.. makes me scrappier than I may have turned out if my parents gifted me money without basic financial smarts (which is what happened but without the money part)
Fabulously Broke in the City
Just a girl trying to find a balance between being a Shopaholic and a Saver...
How much less would you estimate your net worth if you excluded ALL the money you have been given over your life, including the assets you have been able to purchase/finance because of this money and the investments/returns you've made with this money. (So that the average reader would have an idea of what someone in their 20's should reasonably be worth.)
I figured as much. I've lived around enough money that I can tell the difference between "rich" and "wealthy."
DP's on your condo and rental properties take time to accumulate, even if you were earning 100k/year straight out of college! I knew you had to have major family money!!
For the anonymous above me...I earned 37K when I graduated in 2004 and about 50K now in an average cost of living area. I was worth 60K in May and about 50K now after stock market drama and lots more contributions. For benchmarking, I graduated with no debt. I save about 20% of my income and have spent plenty on travel abroad, but I drive an older car.
Ex-BF graduated into the 2001 tech bust, earning $45K then and about 80K now in software. Pre-crisis he had $70K in 401k, owned a property, drove a nice car...I'd estimate him around $150-200k net worth. He had some perks like working abroad, so expenses were comped for a year and a half and he rented out the house.
Both of us spent money based on our values. I was thriftier on cars but he was thriftier on clothes. He spent a small fortune (500/mo) dining out.
So, if you're a college grad w/ no school debt, and earn a business-major salary or better, by your mid-upper 20s it is realistic to attain $50k-200k in assets while still living reasonably well.
To above anonymous, there are a zillion pf blogs by 20 somethings that don't have this kind of luck. I'd say networths in the pf crowd range from $0 (or negative) to $150k (for those who did a lot right). Exceptions exist.
Meg, you seem very grounded and smart and hardworking, gaining all the perks of having a "silver spoon" without the annoying downsides that sometimes come with it (spoiledness, wastefulness, etc). You must make your parents and grand parents proud!
PS - I'd also like to apply for adoption into your family, thanks! :)
I appreciate all the positive comments! It definitely feels weird sometimes to be blessed with such generous and successful family members. But I definitely don't feel like I have money "coming out of my wazoo" or anything. I guess that's because I know lots of people who have many many times what I do - the proverbial rich kids.
I'm about to write a follow up post to address some of these comments. Lots to say!
I really enjoy your blog - especially your openness and honesty. Today's revelation explains the tone of yesterday's blog (seemed just a little harsh - what with notice of eviction after only 30 days (really?) and marring credit to the fullest extent).
While I was feeling your pain about dealing with the tenant who skipped out leaving a bunch of furniture (a hassle), I have to say am so glad the landlord I had while struggling to put myself through college did not move to evict me when I fell 30 days behind on rent (which happened 3 different times over 2 yrs - the latest I ever was was 44 days). He even cut me a break and didn't charge the regular late fees - God bless Mr. Orlowski for that!! I may not have finished college (and gone on to become an atty) if it hadn't been for him.
Now, years later, I have the opportunity to cut my own renters some slack from time to time. Sure, it costs me a little here and there, and I have had to evict renters (we notify at 60 days and it is easier to evict in my municipality - usually 30 days after notice if no effort to pay).
If you've never struggled to make ends meet without any safety net it is probably more difficult to not take it personally when someone is late or skips out. I know that it happens, and usually the people are not intentionally trying to rip me off. I remember what it was like to barely (or not) make it from one paycheck to the next without any safety net and I try to be compassionate while being moneywise.
Sorry my first comment was so long and kinda preachy. Your post yesterday just struck a nerve (flashbacks to college and tuna/top ramen delight for 2 weeks straight). Please keep sharing all your trials and your fortunes.
"So, if you're a college grad w/ no school debt, and earn a business-major salary or better, by your mid-upper 20s it is realistic to attain $50k-200k in assets while still living reasonably well."
I'd like to back this anon up. Getting to that point without family help depends a lot of lifestyle choices, though. I rented a room in someone else's house while I saved up for my townhouse (which I bought at 25). The vast majority of every raise went straight into my 401K. When you're used to dorm room life and a minimum wage college lifestyle, it is very easy to put away large amounts of money from those early jobs without feeling too deprived. That is, of course, if you don't have student loans (which I, thankfully, didn't).
Most people's first mistake is when they graduate college and move straight into a fancy apartment that they fill with lots of expensive furniture and put a nice car in that driveway.
@ Lloydsma - I actually am VERY flexible with my tenants when it comes to being late, much too flexible according to many long-time landlords.
I have one tenant right now who has gotten over 30 days past due twice since I leased her the place last March. She is still not current, owing me half the rent for December and January's full rent as well.
The difference is that she keeps in touch with me.
She calls me proactively when she's going to be late, pays as she can, and always returns my calls promptly.
I had no choice but to leave a notice to vacate on the tenant after 30 straight days of calling and emailing and mailing notices with no response. THAT, I cannot and will not tolerate.
And of course, it turns out she was already gone anyway. Which I wouldn't have found out if I hadn't gone to serve the eviction notice.
@ Lloydsma - but you make a good point about me never having had to struggle. Which will be the topic of my next post!
As a landlord who got severely burned after being "nice" to deadbeats, I have to (respectfully!) disagree with Lloydsma.
Renting our property is a business and tenants are not your friend or your charity case. I know this sounds harsh, but tenants sign a legally binding agreement and if they fail to meet their end of the agreement, I (their landlord) will end up subsidizing them out of my own pocket if they don't pay their rent. So I have to protect myself and my business by following the law to evict nonpaying tenants as quickly as possible. (All the while hoping they don't trash my property or steal stuff on their way out, like my refrigerator. That cost several hundred dollars to replace and guess who paid?)
This is true especially if the tenants are not even responding to calls! (Or in my case, repeatedly lying to my face about a check that's "in the mail" so they can eek out another free month.)
Meg, thanks for sharing your experience and being so open about your privilege! Knowing about your gifts makes me feel like less of a PF failure when I see your numbers. ;)
I, too, disagree with Lloydsma. I'm a landlord (no family money here, had to scrimp and save for downpayment) and when my tenants are late, it's means there are TWO people having financial trouble-- the tenant and me! And that's just not cool!
re: the eviction procedure:
It is also always possible to retract the eviction or not follow through with it if the tenant comes up with the cash and begins to pay on time. What is not possible as a landlord is to speed it up if you never started the process in the first place. The court's don't care if you were "nice" for 2 months and got taken for the rent. Eviction timelines are set by law and if you don't begin the eviction process as soon as you should.
yeah, you don't want to be bringing this up in your "real" life except to people who understand the concept of inherited money--which means people who are either very level headed, or those who have a similar inherited stash themselves. It's just a pain to have to deal with people's animosity and projections and jealousy around this issue, so it's best to be verrrry very careful about revealing this to anyone.
I think it is very smart of you to keep this issue on the down-low.
As to "not deserving it", well, the world really isn't fair is it? That doesn't mean you shouldn't enjoy and benefit from the resources that are available to you. Congratulations on your good luck in having these resources from your family, on having them be (apparently) relatively strings-free, and on having your own career and independence and the good sense to make good use of what you have instead of blowing it on stupid stuff.
ps I hope you are taking advantage of the depreciation from the properties to offset your earned income. But I'm sure you knew that.
elicits not illicits--a Freudian slip??
I'm a tf kid as well. I am glad I found your blog.
Namaste
Thanks Frugal Scholar! :)
Meg:
I didn't mean for it to be disparaging with that wazoo comment. What I meant was ... in comparison to ME, you have money out the wazoo :)
But from your perspective, I guess you don't...!
And as for net worth.. I think that most 20-somethings have $10k or less, if that. Sad to say..
Fabulously Broke in the City
Just a girl trying to find a balance between being a Shopaholic and a Saver...
apparently my boyfriend got some of that sort of money from his grandmother, with the condition that it go directly to paying off student loans. I have to admit, I was a little startled to hear about this sort of thing. But it seems like a good idea.
Wow.
I wish to be as fortunate as yourself. ;)
Least I say, you are financially saavy about it. Nice touch.
Very interesting post as I am in a slightly similar situation. My wife and I both grew up lower-middle to middle class. Five years ago my wife's folks came into a large sum of money, and gave us about $400K. Given that we were already happy with our financial situation before this (Being both raised frugal and me now making $120K/year and saving half of my take home), it was hard for us to know how to react to this.
We basically invested all of it so we could keep "that" money totally separate from "our" money, and we haven't spent any of "that" money. Our spending probably has loosened a little (we buy 2 year old cars now instead of 4 year old cars) and I do work/make a little less (I have a bit of control over that, used to take 10 days off a year, now more like 20), but we still spend significantly less than we make. It's definitely taken a lot of presure off (having that big of a backstop, I'm self-employed), but since its obviously not enough to retire off of in our mid-thirties, it's kinda nice that the practical thing to do with it is not touch it and let it grow, thereby letting us to continue as we did before the gift, because I admit I do have this desire to do it all on my own. 5 years ago I probably would have a different opinion of you as one of "those trust fund kids" that always seemed spoiled, of course today is different.
I don't doubt your tale but how could you not know the money was there? What about 1099s?
Unless it's in a 529 once you turn 18 that money, if really in your own special account, gets reported under your social.
@ Anon (right above this) - many trusts have their own TIN # and the income is NOT reported under my own social security number or name. I just happen to know about the funds, but I wouldn't otherwise.
MEG,
I love that you have been open about receiving the gift. I too receive the max every year and never talk about it in "real life". I find it funny that people equate a $12,000 gift with being raised on a silver spoon. I've worked hard just like you have and have never spent a penny of the gift money, it goes directly into savings/investments. In reality it is a small amount of money, less than 20% of what my husband and I save of our own income each year. I don't think one is spoiled if one doesn't change their lifestyle based on the gifts of others or come to rely on those gifts. I also don't understand being envious of anothers' good luck. If a poster was suddenly given a million dollars I would be happy for them and curious how they will respond to such an unexpected windfall. To me it is critical to realize that each of us has a future debt (retirement/old age) we need to save for today, having a bit of savings does not make one rich.
MEG,
I love that you have been open about receiving the gift. I too receive the max every year and never talk about it in "real life". I find it funny that people equate a $12,000 gift with being raised on a silver spoon. I've worked hard just like you have and have never spent a penny of the gift, it goes directly into savings/investments. In reality it is a small amount of money, less than 20% of what my husband and I save of our own income each year. I don't think one is spoiled if one doesn't change their lifestyle based on the gifts of others or come to rely on those gifts. I also don't understand being envious of anothers' good luck. If a poster was suddenly given a million dollars I would be happy for them and curious how they will respond to such an unexpected windfall. To me it is critical to realize that each of us has a future debt (retirement/old age) we need to save for today, having a bit of savings does not make on rich.
I wanted to comment on one of the "gift tax avoidance" situations I got into w/my parents. In 2004 my parents said they wanted to help me buy a home by "giving" me 100k for a down payment, I was told however that we had to do it as a loan which they would "write off" over 5 years between them as a gift, in 5 years the money's mine cut and dried I was told. I asked alot of questions about the "write offs", when do they happen, what if one write's it off and the other doesn't want to etc.,I assumed wrongly that something was filed every year, that something actually happened every year to decrease the note.I signed the note saying I owed them 20k per year plus interest without knowing anything about gift taxes or the real reason for the note. To my horror I discovered that nothing happens, nothing is filed decreasing the note, nothing is "written off"(you don't write off a gift except in certain circumstances).It's over 5 years later now and since I discovered how this whole thing works i continue to stuggle w/it. My Dad did finally file a gift tax return to let me out of this note but I had to basically force him to do it and it's harmed our relationship a great deal. I just don't want this to happen to anyone else.
@ Anon 10/2 - If it's set up as a loan and you sign a promissory note then you should have every intention of paying the loan back per the terms of the agreement - even if your parents said they'll forgive it as a gift to you. The way you handle that is to make the loan agreement very easy - you could have made the terms that you would pay interest only payments at 2% instead of $20K a year. That way even if you get stuck with it as a loan, it's still a great deal for you.
Keeping records is an important part of the process in case anybody ever gets audited. But whenever you're given a gift, it's only the givers who have the burden of proving what they intended and worrying about paying taxes on it if necessary.
If it's a loan you need to worry about it and demand to see proper paperwork if/when the loan is forgiven each year (and keep records of any payments you make) because if you never pay it back then legally your parents could sue you for payment one day - or if you default they could claim it as a loss on their taxes and then the IRS could come after you for income taxes on it.
When I bought my rental property my grandfather lent me $40,000, and I signed a promissory note so that he could document that it was a loan, not a gift, if he ever got audited.
He forgave $26K of that loan the first year (he forgave $13K and so did my grandma as my annual gift), and next year he's promised to forgive the rest. There's no formal way to document it as far as tax returns since you don't have to report gifts under the annual exclusion amount. However I assume he writes a simple one page "as of this day my wife and I forgive $26K of this loan as my 2009 annual exclusion gift to my granddaughter" and signs it and put it in the file with the promissory note.
I haven't seen that document, but I trust that he keeps good records because he gives a lot of gifts and loans each year and has 2 full time assistants to take care of records for him. But it really doesn't matter unless he ever demands payment from me anyway. And the important thing is that if he did then I could - and would - pay it all back to him tomorrow.
@ Anonymous:
What I read as happening was this: BEcause there is a $9000 cap on gifts (any amount over $9000 in any given year that is given to you by them as a gift will be taxable to you, they decided to give you the 100,000 as a loan, which you then would not repay (though you technically have legal obligation to repay if, for example, they decided to call you on it because, say, you got in a fight or they suddenly needed it.) They would claim that as an unrecovered debt and depreciate it over 5 years because the tax laws allow you to depreciate an unrecovered debt. This depreciation would decrease their taxable income by offsetting any income or capital gains or interest over those 5 years to the tune of 100,000 dollars.
It's a clever move and basically illegal from the tax standpoint (on their part) since they never intended you to actually repay the loan. They were also trying to protect you by not documenting it properly. But I think I am correct in saying that you are now legally on the hook for the taxes for 100,000 of taxable income in the year that the loan was technically forgiven (papers were drawn up-) and those taxes are due in a lump sum so depending on your income that could put you above the 30% marginal tax bracket at least for some of it and you could be on the hook for about 30,000 which the feds will want as soon as possible.
Meg, each of those years that your grandparents "forgave" the loan, you are required under U. S. tax law to claim the same amount as income. If you want to be straight as to the tax situation, you need to file amended federal and state tax returns for those years and include the money in those years.
This is the same rule and logic I believe that requires people who execute short real estate sales to claim the amount of money the bank has let them off the hook for as income for that year.
people who advocate this kind of move are generally relying on the fact that that audits are fairly rare, combined with a kind of justification of their behavior that there should somehow be a way to give more money away tax free than they are actually legally required to.
This kind of "relaxed" ethics around tax bills is fairly common, though not absolutely rampant, in moneyed families in my experience.
Rereading the posts and my comments, I want to backtrack a little:
extending a loan with the stated intention forgiving parts of the loan in future years in effect negates the claim that the money is a loan. Or that's how I would look at it if I worked for the Tax Board or the IRS. Which is why a lot of these deals are not documented on paper: if written evidence is found of the original intention, it would likely constitute tax fraud.
That's my take.
@ bugbear - I think you need to do some research on this issue.
1 - The maximum that can be gifted in 2009 by one person to one person is $13,000 (it was $12,000 in 2008). And so parents as a married couple can give $26,000 a year to their child without having to pay any gift taxes.
2 - Gifts are never taxable to the recipient - only to the giver. If my mom gives me $5,000, $50,000, or $500,000 I do not have to pay one penny of income tax on it. She, though, would be subject to gift taxes and responsible for filing a gift tax return with her taxes that year.
3 - You said that "extending a loan with the stated intention forgiving parts of the loan in future years in effect negates the claim that the money is a loan...which is why a lot of these deals are not documented on paper: if written evidence is found of the original intention, it would likely constitute tax fraud."
This is definitely not true. Extending a loan to a family member is perfectly legal and ethical, as long as you charge an interest rate at or above the IRS published minimums each year. Forgiving part of that loan is also perfectly legal and ethical, as long as you pay gift taxes, if applicable, on that gift. The IRS knows this is common which is why they publish all kinds of rules about it - how much you can forgive each year, what interest rate you have to charge in the meantime, etc.
And documents are only not kept when people don't know what they are doing or are sloppy - n
I read the first article from your blog today and immediately subscribed via Google Reader. I wondered why everything you said made total sense to me...until I read this post. Now I understand why. My family has money like this too, but it's in the generation above me instead. I read a ton of finance blogs (Finance major) and yours is the best I've read so far. I really am tired of reading about saving money by using cloth napkins instead of disposable paper ones.
@ camorra - welcome to the blog! I'm glad you've enjoyed it so far. I try to offer my different perspective which goes outside the typical savings advice we all hear over and over (not that it isn't relevant and important). But if you're into re-using ziplock baggies this may not be the place for you! :)
@ Meg,
thanks for straightening me out!
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