Did anyone else see that viral stat from NY Mag stating a whopping 50% of adults are supported by their parents!? On top of that, only one-third of adults under the age of 43 manage to support themselves without parental support. That’s insane. It got us thinking about how prenups can help (are you surprised?). A prenup can make sure those gifts from the ‘rents are protected in any scenario. Let’s dive into why adults who are subsidized by their parents should consider a prenup.
How parents are giving money to their adult kids
If you think your parents’ support isn’t really “support,” think again. Gifts from parents can come in many shapes and sizes. According to NY Mag, here are just some of the ways parents are “sneakily” giving money to their adult kids:
- Cash: Cold hard cash is still a gift, even if it’s in Benjamins.
- Below-market loans: To avoid a gift tax, parents are sometimes offering extremely low interest rates loans to their adult children to purchase homes or pay off debt.
- Mortgage: Parents can buy a piece of real estate in cash for their child, who then uses a HELOC to reimburse the parents and refinances into a fixed-rate mortgage, becoming a homeowner while repaying most of the parental loan.
- Buying a house and letting the child use it: Parents are simply allowing their kids to live on their property. The market-rate rent is actually *technically* the gift to the child.
- Paying credit card debt: Parents can pay off credit card debt—it’s technically a gift, even if it isn’t wrapped up in a bow!
Remember, people can only formally “gift” their adult children a certain amount ($19,000) before they are required to report it and pay taxes on it. This is why parents are getting creative with the gift types, such as just handing their kid a pile of cash to avoid the IRS.
Why are parents gifting?
So, why are parents finding creative ways to give gifts to their kids? Is it out of the kindness of their baby boomer hearts? Is it out of necessity?
Well, part of the reason is that millennials are generally worse off than older generations at the same age, meaning that they make less money and have fewer assets. In addition, homeownership has become a pipe dream. Purchasing real estate has become increasingly out of reach for millennials (thanks, housing shortage).
The other part of it is avoiding estate tax. When people die, if their estate is over a certain amount ($13.99M), they have to pay a tax. So, parents are giving gifts during their lifetime (to their kids) to avoid this tax when they die.
What happens without a prenup
Let’s use an example from the Intelligencer’s article, which refers to real people who get money from their parents. This particular example is the 34-year-old teacher who got “a couple hundred thousand dollars” to put a down payment on an apartment in Manhattan when she started getting serious with her boyfriend. The couple eventually got married. Now (during the marriage), the 34-year-old teacher gets an “allowance” of $2,400 a month from her parents.
So, let’s talk about what this would look like in a New York divorce without a prenup. There are two parental assets at play here: the down payments given before marriage and the monthly allowance given during the marriage. Both are from the wife’s parents.
In New York, the appreciation in value on the house that occurred from the date of marriage to the date of divorce filing would be considered marital property. In addition, the $2,400 monthly allowance could also become a part of the marital estate if it is commingled—such as if it is placed in an account with funds earned from employment or used to purchase an asset in joint title. On top of that, the allowance could be imputed as income for the purposes of spousal support and, since it is a tax-free payment, could be “grossed up” to an even higher amount. Potentially creating a claim for spousal support where one might not otherwise exist based solely on earnings from employment.
Moral of the story? Without a prenup and clear boundaries in place on assets, your parents’ gifts to you could be split up with your future ex-spouse.
How a prenup can help
Prenups can outline what gifts from parents are separate property. For example, if your parent gives you a monthly allowance, a lump sum for a down payment, or simply let you live in their empty real estate, you can ensure that these assets stay within the family if a divorce ever arises.
In addition, you can both ensure that gifts from parents (or allowances) are not considered “income” for the purposes of spousal support—or waive the possibility of spousal support altogether (after all, according to NY Mag, two-thirds of adult children have their parent’s support, so this might make sense).
The bottom line is a prenup can help protect mom and dad’s hard-earned support
So, whether you’re a millennial relying on the “bank of mom and dad” or a parent wanting to protect your hard-earned assets, a prenuptial agreement is no longer just for Hollywood and the ultra-rich. It’s a practical tool for anyone, especially people getting financial support from parents. Prenups can make sure those generous parental gifts don’t become a source of conflict or get lost in a divorce settlement.
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: Nicole@Helloprenup.com
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