What’s a Better Gift Than a Grand Wedding?
First, congratulations! You’ve brought your son or daughter through all the challenges of infancy, childhood and young adulthood. You’ve worked hard to give them the best of everything. Now they’re engaged, and most likely the temptation exists to reward them, and yourselves, with a lavish wedding.
But consider this: The average wedding today costs approximately $30,000, according to The Wedding Report. And it’s much more in cities like Manhattan or Chicago. For more extravagant affairs, wedding costs can easily surpass $100,000. Regardless of whether you can afford it, you should ask yourself: Is paying for this single day truly the best investment for your beloved child’s future?
There are a number of alternatives to paying for a wedding that still allow you to give your child a meaningful gift to celebrate the next chapter in their life. But remember that gifts of this magnitude (even the wedding itself) could be taxable.
The tax rate for gifts is currently 40%. However, each parent has an annual exclusion of $14,000 from gift tax. If a husband and wife are giving to a child and their fiancée, they could gift $56,000 tax free (4 x $14,000) in one year. If the gift is divided among two calendar years, the gift tax-free amount doubles to $112,000.
Here are some alternatives to a grand wedding, and a few potential ways to avoid the gift tax issue as well.
A gift of knowledge
Maybe you’ve covered most of your son’s or daughter’s college expenses. However, there still could be some residual school loans or credit card balances that will be very difficult for them to pay down with their initial income. The average college graduate leaves school owing approximately $34,000, resulting in a need to defer many of the “rites of passage” experienced by other generations, like buying a home or starting a family.
Consider paying off their account balances. Beginning a new life together is an inherent adjustment, and debt can lead to stress and discord. A fresh financial start may be the best wedding gift of all — providing them the freedom to pursue their most promising career paths instead of needing immediate income to cover debts.
And if your bride or groom has intentions to further their education in graduate school or beyond, you can avoid the gift tax by paying the tuition directly to the qualifying educational institution. The amount you’d spend on a wedding could instead help launch a very profitable professional career that pays dividends for a lifetime.
Also, use this opportunity to encourage your child to have an open and honest conversation with his or her spouse-to-be regarding shared financial goals.
A special day vs. a special experience
Would a more lavish honeymoon, or even several months of living and traveling abroad, provide more enriching memories than a day in a fancy ballroom? You could fund this trip with the money you would have spent on a major wedding.
A home of their own
Saving up for a down payment on a first home may take many years, even decades, for the newlyweds. Have you considered offering a down payment? As you probably know from your own experience, real property is a major asset — providing a base of net worth and credit worthiness, a trade-up for future homes, and a valuable lesson in the value of long-term investment.
Lending standards for home buyers are higher than historical averages, making home ownership unattainable for many. And as home ownership continues to decline, rent is becoming more expensive. A gift towards a down payment on a home will give your child the opportunity to save on rent and start building equity.
To avoid making large taxable gifts, consider a loan at a low interest rate and with interest-only payments. You could even pair a loan with a cash gift.
A new career pathway
You may envision your son or daughter taking over a family business or following you into a profession where your guidance and connections could help pave their way. Keep in mind, however, that your adult child may have developed interests, talents and passions far different than yours.
Consider helping them start up a business of their own. Your investment in the company of their dreams could be the most profitable you’ve ever made — building a stronger family relationship based on your love and support for their individuality and entrepreneurial courage.
To avoid the gift tax, you should receive an ownership interest equal to the amount of money you invested. Or you could potentially provide an interest-only loan as described above.
Times they are a-changin’
Today, college-educated young adults marry for the first time at a higher age than at any time in American history. The median age for women is about 27 years old, and 29 for men, according to the Pew Research Center. You may be surprised at how receptive and mature the engaged couple can be in understanding and responding to your family discussion of their wedding options.
Lastly, consider giving them an open-ended gift and pass the responsibility of budgeting and prioritizing onto your adult child. This may be one of your last opportunities to impart your financial wisdom and values.
No matter what gift you make to your child in recognition of this important milestone in their life, be sure it’s an amount that is a comfortable level for your financial situation. And be sure to consult an estate planning attorney if you’re looking to minimize gift taxes.