Dear Quentin,
I have an adult son who is 27 years old and works in the tech industry. I love my son, but he is not disciplined when it comes to money. He has been living in an 800-square-foot apartment in one of the most expensive cities in the U.S. Buying a place on his own is out of the question given his salary, current property prices and rising interest rates.
My solution to rescue my son from his tiny apartment is to buy a house for him. He is not married. I want him to sign a promissory note and pay me back interest-free over the next 20 years. I want to somehow insert this promissory notice into the title so that he will not be able to sell the house without my consent. Also, if he does not keep up with his payments I will have recourse to take action. I am 99.99% sure that all my concerns will end up groundless, but I want to have this in writing to be sure.
“‘I am 99.99% sure that all my concerns will end up groundless, but I want to have this in writing to be sure.’”
His monthly payments will be important but not critical to my daily life. I have more than enough money to cover my expenses, but it is important for me not to create an opportunity — even to the most innocent mind — for doing something silly. I want to be fair to my son, who has been a very good kid, but I do not want to compromise too much during my own retirement years. I have been working since I was 14 years of age (I’m now over 65), and I recently retired comfortably.
Is this a good plan? Should I proceed with it? Is such a promissory note sufficient, and can that be inserted into the title in the same way a lien works? My son is not careful with money. I hope that this process teaches him a bit of financial responsibility and that his quality of life improves significantly. That is my main objective.
Please let me know what you think.
Loving Father
Dear Father,
For many young people living in big cities in 2023, an 800-square-foot apartment would be an absolute luxury.
It’s safest to make financial decisions with a cool head and a steely resolve. Of course you love your son, but you should not allow emotion to rule your finances. This will be one of the biggest purchases — if not the biggest — you make in your lifetime, and you will be relying on a third party to pay the bills. Seek legal and financial advice before promising anything.
You would need to arrange — with a real-estate attorney — a promissory/mortgage note and a deed of trust. The former outlines the terms of the loan: the interest rate (0% in this case), when each payment is due, the length of the loan, etc. The latter establishes that your son is obligated to repay the loan and outlines exactly what happens if he defaults.
Alternatively, you could reduce your financial commitment by giving your son a down payment or paying for a portion of the house so that the mortgage repayments are within his reach, cosigning on the loan and putting both your names on the deed. With the 30-year interest rate edging closer to 7%, however, this may be a less attractive option.
If you did cosign on a mortgage with your son and you contributed to the closing costs, that contribution could be viewed by the Internal Revenue Service as a gift if it’s more than the annual exemption ($ 17,000 for an individual in 2023). Under current rules, an individual may give away $ 12.92 million in assets or property over the course of their lifetime.
Neil Carbone, trusts and estates attorney at Farrell Fritz, said you could provide your son with an intrafamily mortgage loan. “Intrafamily loans can be good estate-planning vehicles because the interest on such a loan is generally lower than can be obtained through a commercial lender,” he says.
“The interest rate will typically be set at the AFR, or applicable federal rate, which is the lowest rate that can be charged without the loan being considered a gift. Another benefit of an intrafamily loan is that the repayment terms can be more flexible than a commercial lender may be willing to provide. “
For example, the loan can provide for payments of interest only for a period of time, with a balloon payment at the end, he says, and the loan must be carefully documented and the mortgage will be listed as a lien against the property, so you will have protection if your son fails to make the payments.
“‘This gift would change his life and show him how fortunate he is to have such a generous father, and he should — in theory — change his ways. Unfortunately, however, life rarely works like that.’”
This gift would change his life and show him how fortunate he is to have such a generous father, and he should — in theory — change his ways. Unfortunately, however, life rarely works like that. Financially reckless people don’t change overnight and, if the years I have spent writing this column have shown me anything, it’s that free gifts rarely spark a complete transformation.
In fact, they risk doing the opposite. Free gifts often have the capacity to seem like a reward for imprudent behavior. Although you expect your son to meet his monthly obligations, as any landlord will tell you, you should prepare yourself for a missed payment here and a missed payment there, or for 90% of the payment one month and 100% the next, followed by 70% the next.
You should ask your son some questions before you go ahead with this: Has he paid off his credit-card debt? Does he have six months’ worth of emergency savings? Would he submit to a monthly “wallet check” over a period of six months to make sure he can stick to a budget and resist the temptation to overspend? Would he agree to meet with a financial planner?
You should also meet with a financial planner to “stress test” your finances. How would a default affect your credit? Will you incur a gift tax? What if you had a medical emergency or needed long-term care? From what you say in your letter, your son may not be in a position to help you out. Do you have long-term care insurance?
And be prepared for the unexpected. Home values generally go up over time, but they can also fall without warning. The housing market has been on a tear for the last three years, but there could come a time when property values fall and the house is worth less than what you paid for it, or less than what you owe if you decide to take out a mortgage.
Alternatively, you could create a trust for your son’s benefit and put the house in that trust, and make a gift of cash to the trust, which could be used to purchase the house, Carbone adds, and as a beneficiary of the trust, your son could be permitted to live in the house rent-free provided that he pay for the upkeep of the house. (Or, preferably, charge him rent and ask him to be responsible for the upkeep, so it keeps him accountable and also helps with your own cash flow.)
Hard knocks, learning from past financial mistakes and wins, and appreciating the value of a dollar by working hard for what he has — along with advice from a financial adviser and trusted attorney — are far more likely to help your son than the proverbial gift horse. Your son, like millions of people his age, is living in a small apartment and getting a sharp dose of reality.
It is, regrettably perhaps, a rite of passage. But it will help build character and allow him to appreciate any steps he takes up the property ladder in the future. He may even look back on this part of his life fondly. The gift of a house should be more than a way to teach him a bit of financial responsibility. And I’m not sure it will help him in that endeavor. In fact, I recommend you have him meet a series of financial goals before you decide to sign on the dotted line.
You have the opportunity to give your son a head start, but I hope that he also learns how to stand on his own two feet.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
More from Quentin Fottrell:
My boyfriend wants me to move into his home and pay rent. I suggested only paying for utilities and groceries. What should I do?
My dinner date ‘forgot’ his wallet and took the receipt for his taxes. Should I have called him out for being cheapskate?
My boyfriend lives in my house with my 2 kids, but refuses to pay rent or contribute to food and utility bills. What’s my next move?