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I have two children. My oldest has a mortgage and pays interest on it. I have cash savings but do not earn significant interest on them. Since I don't need all of the money for myself, I would therefore like to pay off his mortgage and ask for interest payments for a period of time before writing off the loan.

However, I want to be fair to my younger daughter, who has no debt (She has paid off her mortgage on a cheaper house than her brother). I can promise the same cash amount later, but how do I financially value the benefit my son gets now?

(Note that in the UK one can give any amount tax-free but it will be subject to a (tapering) amount of inheritance tax on your estate for up to 7 years).

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    What's the point of the interest payments if you're going to be writing off the loan (i.e. effectively giving money) later anyway? – Ganesh Sittampalam Jul 22 at 10:10
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    Is your concern that giving each child £X would benefit your son more than it would your daughter, so that you want to give more to the daughter to compensate? – chepner Jul 22 at 13:48
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    It's hard to say. Maybe your son would have paid the mortgage according to schedule. Maybe he would have paid it off early. Maybe he would have sold the house before paying off the mortgage. Maybe paying off the mortgage now prevents a foreclosure in 3 years. Perhaps your son has other uses for cash and would prefer to use it for something other than the mortgage. – chepner Jul 22 at 14:59
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    I would therefore like to pay off his mortgage and ask for interest payments for a period of time before writing off the loan. It's not clear at all what you mean by this statement. Are you loaning the money to your son expecting him to pay it back to you with interest? Are you paying off the mortgage and then collecting from him what he used to pay in interest charges for some period of time? Until he repays what you gave him? Until you get tired of receiving payments? Can you explain this plan in more detail? – J... Jul 22 at 18:42
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    Is there a clear reason why you want to pay off all of his mortgage, rather than just give him a partial payment towards it and use the rest for your daughter? – Dragonel Jul 22 at 19:26

13 Answers 13

76

Loaning money to close relations tends to end poorly. You are better off not loaning your older child money. This solves all your issues except for one.

You mention that your cash savings are earning "almost nothing". Is this an emergency fund, or money that can be invested? If it is an emergency fund, you have yet another argument against paying off your the eldest's mortgage.

If it is money to be invested, well you need to get better at investing. You may want to talk to an financial adviser or do some of your own reading. Any book by Jack Bogle would be a great place to start.

Another option is if this is just excess money, you can give money to your children equally. Just give an equal amount without a mandate how they use the money. The eldest may use it to pay down their mortgage, or they may use it for something else.

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    Thank you for your thoughts. It isn't an emergency fund, and I have other investments and a good pension. The problem I see is that at the moment, my son pays interest to a bank on his mortgage, whilst I receive less interest on my savings: money is leaving the family unnecessarily. I respect your opinion about the wisdom of the plan, but my question was were I to go ahead how much more is what I do for my son now worth than giving my daughter the same amount in (say) 10 years time. Just inflation or are there other considerations? – user432 Jul 23 at 11:08
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    Do you really want to ruin the relationship with one or more of your children over a few pounds? Let your son be an adult and make decisions for himself. And as I said, if you already have plenty of money why not just give an equal gift to each child? – Pete B. Jul 23 at 11:16
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    @user432 you re looking to essentially loan money to your son with interest, that's not charitable so why should your daughter have any issues with it? If you were gifting said amount or loaning it interest-free I could see why it could cause issues but you re doing neither here. – Leon Jul 23 at 13:44
  • @Leon he's gifting the principal sum at a later date by writing off the loan – rdans Jul 23 at 13:50
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    @rdans I admit I got confused somewhere between that and this:"ask for interest payments for a period of time" In any case.. – Leon Jul 23 at 13:54
27

I tend to follow the Keep It Simple, Stupid principle.

Next year at the same time when I give my college student daughter some money for a car, I'm going to give her brother an equal amount of money. (I'll suggest that he add it to his own Car Down Payment Fund -- or if he buys a car by then -- apply it to the loan principal, but it'll be a gift and he can do whatever he wants with it.)

15

If you want to be fair then be fair. It sounds like you wish to gift this money so offer it as a gift.

Hi kids, I have an extra £xyz lying around so I would like to give each of you half.

If this is truly a "no strings attached" gesture then I would like to add that you are a very generous parent.


If this is a dirt-cheap write-off loan you wish to offer then present it as such.

Hi kids, I have an extra £xyz lying around so I was wondering if either of you need help financially? I would like to offer each of you half and the only return I want is a monthly payment equal to the interest which I could have accrued if it stayed in savings which comes out to £abc per month. I would only like payments for the next X years, etc...


If you want to attach some strings on the money's usage then I can foresee something like this going fairly well:

You must use this money for responsible adult decisions such as paying a lump sum against the principal of your mortgage (assuming it is allowed), down-payment on new house, investment property, major home repair, or even placed directly into a retirement account. In order to receive the money, I must be present for when you use it.


Be extremely leery of either one using the money to pay off unsecured debt such as a credit card. There are countless posts on this site which outline why paying off someone else's CC debt is an extremely short-lived proposition.


This is going to be a bit macabre but I am suggesting a 50/50 split now because what happens if you don't have enough time to save up and help the other one in the same way? Would your will reflect the discrepancy of giving only one child assistance?

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    This is in the UK. Scratch “medical bills” from the list, because there won’t be any. – Mike Scott Jul 22 at 19:32
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    @MikeScott Oh, ok. ~sobs quietly in 'murican~ – MonkeyZeus Jul 22 at 19:34
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    @MikeScott they may have private health care, dental requirements or even some private costs even when using the NHS (watersidemc.nhs.uk/fees.asp for example) – Ryan McDonough Jul 23 at 10:56
  • +1 50/50 split is the only thing where it is unlikely that one feels that the other is favored. If you need to spread it out in time a bit, make sure it is linked to a clear event. For instance '30th birthday'. – Dennis Jaheruddin Jul 25 at 8:21
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can promise the same cash amount later, but how do I financially value the benefit my son gets now?

I suppose your question is outlined above. You want to give money X Amount to your son now and same amount X to your daughter, but later, and wondering if that is fair.

In a positive interest rate environment "dollar today is worth more than a dollar tomorrow" (or pound). If you know the after how much time (T) later, you want to give amount (P) and approximate the interest rate (R%), than extra economic benefit that your son is getting is [(P ( 1 + R )T - P) in comparison to your daughter assuming annual compounding.

So for sake of example if you give your son UK#10,000 on August 01, 2019 and interest rate is 4% and you are giving your daughter same amount UK#10,000 after three years than your son has received [(10000 /(1+0.04)3 -10000]= 1248.64 as extra Financial Value.

Also consider "Loaning money to close relations tends to end poorly", but gift to both( in case of gift you are not asking it back) should be fine. A family is there to help each other.

8

The reason this is so confusing is that 3 different forces are acting on this mess at once.

  • Giving a gift to one child (and not the other)
  • Lending money to one child (and not the other)
  • Investing your own money for a viable return

I get where you are trying to create synergy here, but this is creating an overload. In our culture, dealings with money with relatives has an extremely corrosive effect on social relations, you could become estranged from this. Family is far more important than money.

Loaning to family creates confusion "Loan or gift?"

The problem with lending to family is that you are expected to understand if they are having trouble. Which puts you firmly on the bottom of the priority list for payback. And there's not a darned thing you can do about it! What are you going to do, sue them? Report them to credit bureaus? Absurd. The most you can possibly do is sell their mortgage to a different lender, but you'd have to do that at a discount.

The borrower knows they have you over a barrel, and you have no practical means to force them to pay. This is a recipe for family disaster.

The myth of "keeping it in the family"

This point brought to you by the word "Fungible". Let's say your brother sells BBQ sandwiches. They are very popular and he always sells out - he can get a full retail $10 for each sandwich, every time.

You are hungry for a BBQ sandwich. Your brother could give you a free sandwich, but then, he wouldn't have it to sell to a paying customer, so he'd be out $10. Therefore you agree to pay $10, but then your brother feels guilty. "Keeping it in the family", right?

But let's suppose instead, he sells the sandwich to a stranger and collects $10. Meanwhile you buy a sandwich from the other BBQ shop down the road for $10. What is the financial impact of this?

It's a wash. It does not matter which one occurs. He earns $10 either way. You pay $10 for a sandwich either way. Except that by buying at the other shop, you get competitive intelligence you didn't have before.

Similarly, it is a wash for him to get his mortgage from a stranger, and you to place your money in some other kind of investment that pays a comparable amount.

The real issue is learning to invest

I think the appeal here is that loaning to family seems like the best investment you know how to get. That is simply a matter of learning how to invest. I say "simply" because profitable investing is actually much easier than most people think.

So my recommendation here is to learn the craft of investing, and place your investments with strangers.

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    The analogy with the supply-constrained sandwich doesn't quite work, as you can't invest money with the same risk-reward profile as a mortgage. – Ganesh Sittampalam Jul 23 at 19:29
  • @GaneshSittampalam You can lend a mortgage. To a stranger, hence removing the familial complications. And it's generally accepted that stock investments outperform real estate. – Harper Jul 23 at 21:50
  • maybe in theory, but I'm not aware of any practical way of doing that in the UK. And stock investments certainly don't have the same risk profile. – Ganesh Sittampalam Jul 24 at 6:44
  • @Harper and what would you recommend to the asker (or a simple reader like me), "to learn the craft of investing"? Any books? Articles about basics of stock investing? You say that "profitable investing is actually much easier than most people think" - I would be more than thankful if you could elaborate on that a little bit. – Eel Lee Jul 25 at 8:33
4

The OP has made it clear that she is interested in exactly how the two gifts can be made equal, considering that the gift to the daughter will come years (in a comment she says perhaps ten years) after the gift to the son.

Other answers have talked about present value, and writing a provision in the mother's will to insure that the daughter does actually get her gift. Other answers have made the point that the mother's proposal or decision should be discussed or explained to both of her children.

All these answers make good, useful points. However, this assumes that the son and daughter are perfectly logical, and that if the money is made equal (possibly after 10 years!), the daughter will feel that she has been treated equally.

The OP cannot make things equal by simply making the money technically equal after a period of years. She is, in fact treating her two children unequally, and is, in fact, penalizing her daughter because she has no mortgage.

It would be different if the son had a real need, but there is no hint of that; he had a want that required a mortgage. Nothing wrong with that.

The OP is running a real risk that however compliant the daughter seems, this unequal treatment will boomerang and cost the family more dearly in non-monetary terms than "money leaving the family". Money isn't everything.

I suggest that the OP consider compromising with her principle of not having money leave the family, by giving the son an amount that will reduce but not eliminate his mortgage, and simultaneously giving the daughter an equal amount.

  • On reflection, this question might be better posted on IPS, as there's no real PF answer to it. No real right or wrong. It's not voted to close as opinion-based, so no migration, yet. Just my observation here. And my +1. – JoeTaxpayer Jul 25 at 1:44
  • @Joe Taxpayer: (1) Thanks! and (2) I disagree that it is suitable for IPS. The OP asked a technical money question, and PF is attempting to answer that. Even I am keeping within the PF mandate by pointing out that people are not the rational actors (is this the right term?) that economists have long assumed. All this is way beyond IPS. The IPS question would ask "how do I explain my plan to my children to avoid hard feelings?" This may be the Q the OP should ask, but it is not the Q she asked. – ab2 Jul 25 at 2:49
  • Fair enough, all excellent points. – JoeTaxpayer Jul 25 at 3:16
3

Assuming you aren't offering a better interest rate than the current mortgage then on day 1 you won't be giving your son any gift. The gift will be given at the point in time you decide to write off the loan.

So to keep it simple, you could gift your daughter the same amount that you write off and at the same time as the write off.

Or alternatively, gift your daughter the money at a later date but taking into account any inflation between the date of your sins gift and the date of your daughters gift.

The only thing I would be careful of is if HMRC consider the gift date to be the date of the written of loan, then your assumptions about inheritance tax might not be as you originally expected.

3

Assuming strong family ties, you could just talk to your kids. Both of them. At the same time.

In my family, we have agreed that I give my mother money for home repairs and get a signed loan contract with 0% interest, which will increase my share when inheriting the home in what I hope will be quite some decades in the future. For my location (Germany) this is better (according to a friend, who is a studied attorney without registration, working in debtors counseling) than putting a paragraph about the money and unequal shares into the will. Some reasons are

  • worth of estate vs. debts could become negative. The loan would then be paid back partially equivalent to other debts, while no money or home will be inherited.
  • will could be changed / challenged

You could do the same in the other direction:
Give the money to your son as a kind of loan, which will lower his share in your will.

This way it is fair (it will be accounted for later) and you don't have to double the sum.

3

I second NoAnswer's answer in general. I would strongly advise you to discuss what you are proposing with both children in advance, separately then together, to get their explicit consent only after listening carefully to what their reactions are, and most importantly to put all sides of the deal in writing.

At the very least there should be a will specifically making sure that your daughter gets her fair share before any further assets are split up evenly. It would be essential to make sure the responsible child is not made to suffer from her responsible behavior.. which is a bit what this is shaping up to be, at first glance. I have also known many examples of promises of later compensation which have come to nothing because the parents did not formalize those terms in time. And that does not lead to warm sibling relationships later, which is sad and surely not your goal.

If you can afford it, I would also consider splitting up the sum you can afford between the children now, or at least giving some substantial sum of money to your daughter right now rather than leaving it all for 'later'. The fact that she doesn't seem to you to need as much money just means she's living within her means. But she could still be able to consider doing something that she might not even able to visualize now if she had a chunk of money available, and the security that goes with it. Go back to school, move to a better house, have a child, start a business, who knows? Just because she isn't asking you for it doesn't mean she'd fritter it away or have no good idea of what to do with it. And as many others have commented, money now is better than money later, not only in terms of actual value but in that a better start in life usually leads to a better end.

Finally, may I recommend a book? http://www.womendontask.com/ might be enlightening about the dynamics of what you're experiencing here, the son who asks because he feels entitled and the daughter who doesn't but instead makes do with what she has. It's not just your family.

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    +1 especially for the last paragraph. – ab2 Jul 25 at 1:40
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    Thank you for addressing the ant-and-grasshopper phenomenon at play here. – shoover Jul 25 at 20:03
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This may not be the kind of an answer you are looking for, but let me offer an alternative prospective. For one, the money is yours, but at the same time, its your families. Your eldest needs the money right now, its nothing to do with being fair. If and when your daughter is in need of any money, this also sets a precedence that you will be there to support her irrespective of the situation. The benefit may not be financial, but it settles you as a support system.

IMHO, thinking in terms of fairness right now might make this feel as a business transaction more than anything. Infact, this might make your eldest feel that this isn't fair. He/She needs this money right now, it will be a big help, but your daughter is in no such need. The emotional impact of this "fairness" might not be a positive one.

0

Not quite the question you were asking, but there are a few products such as YBS's Offset Plus for Savers that allow you to use your savings to counteract someone's interest payments. This may help to keep the playing field slightly more level in that you're not actually giving them money, you're just reducing their interest payments (in exchange for not collecting interest yourself). It fixes the problem highlighted by Pete B's answer about lending money directly, because the bank acts as an intermediary.

The main disadvantage is that offset rates are usually higher than standard rates, and it doesn't quite satisfy your requirements

0

Have you talked to your younger daughter and asked her how she feels? The important thing here doesn't seem to be that you feel that you were treating them evenly, but that she feels that you're being fair - so talk to her and find out what would make her feel comfortable. Instead of trying to figure out a fair way to do it on your own and then dictating to your children what is to be done, try working with them and involving them in the decision, which will not only reduce the chances of resentment but allow them to feel some ownership of the decision.

Just make sure you keep the framing focused on reducing the money leaving the family unit, rather than having it seem like you just want to pay your son's debts and be done with it. That should help make it clear that you're not helping one child over the other, you're trying to help the family overall as a financial unit.

0

It looks like none of the other answers actually addressed your question properly.

Your question was: If I lend my son $X today, and have him pay me the current bank interest rate on deposits for the remaining term of the loan, how much of a "gift" have I given him?

You wanted to use this information to determine how you could give a similarly sized gift to your daughter.

The financial instrument you are describing is called an intra-family loan. Despite all the replies telling you not to do this, it is a fairly common strategy adopted by the affluent. It's obviously a bad idea if you need the money back, but it can be an effective way to manage inheritances and avoid inheritance and gift taxes. Before creating an intra-family loan, you should consult a lawyer, and preferably have them draft the appropriate paperwork. This might cost a few hundred dollars and take a day or two. It's not an unusual thing for real-estate lawyers to handle though. They can also handle the escrow of transferring the money to your son's bank to pay off the mortgage, clearing liens, etc..

The value of the intra-family mortgage to your son is simply a function of the difference in his mortgage rates, assuming you keep everything else the same. You can ask your lawyer to prepare two amortization schedules for the intra-family loan: one at the current interest rate your son pays, and the other at the interest rate you want to charge. These loans will have different monthly payments, because they are made at different interest rates. The difference between these payment amounts is the amount your son is saving each month. You can use any mortgage calculation tool like this one to compare the value of the two loans.

To pay your daughter the same amount, just work out your son's monthly savings M using the method above. Then each month when the mortgage payment comes in from your son, give your daughter $M out of the payment. Each month your son saves $M over what he would have saved, and your daughter receives $M as a direct cash transfer. No need to worry about the future value of the money because they got the same value at the same time.

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