Recently, I was helping newly practicing doctors, Ashok, and his wife, Anita. They wanted me to put together their financial plan, and a challenge came up that I’ve heard many times over the years.
“Our parents helped us with down payments toward our new home. They left it open for us to repay them, but we’d like to pay them back as quickly as possible.” Ashok told me.
“We were so happy to be able to buy a home, as we want to start a family in the next few years.” Anita added. “We couldn’t have done it without our parents.”
Does this sound familiar? (Or maybe you’re the parent thinking of helping!)
Buying a home can be a huge milestone for anyone, and often can even be a core value you hold. The same with starting a family. Problem is, that can be a tug of war with how to allocate income!
And when parents help their adult children buy a home?
Help with a down payment is sometimes a gift.
Other times it’s framed as a loan.
Usually, it’s a mix of both (even if no one says that out loud).
What happened for Ashok and Anita was pretty predictable.
They bought their home, are deeply grateful, and almost immediately want to start repaying their parents. Not because they’re being pressured, but because they want to “do the right thing.”
On the surface, that feels responsible.
But living is expensive! Food, mortgage, car or student loans, trying to save to start a family…it doesn’t take long before they wondered where all their money went.
They’re also in a high tax bracket as they’d had an opportunity to start a practice. I advised them to open a Professional Corporation, (because it’s hard to pass up paying a tax rate of only 11% rather than 40% or higher). Suddenly, there were a lot of plates spinning in the air.
The math can get uncomfortable very quickly. And so can the emotions.
Repaying parents? You’ll need more money outside of your Prof Corp and pay higher taxes. And perhaps not have the cash flow for saving for a family.
Keep more money inside your Prof Corp? Lower taxes make it easier to save for a family, but you feel guilty about not repaying your parents.
This was where Anita and Ashok’s unspoken tension was coming from.
Where the Planning Should Really Start
Parents often just want to be repaid “whenever it makes sense.” Problem is, no one ever clearly defines what “makes sense” means. And that causes stress.
As we explored Ashok and Anita’s options, we wanted to define what was needed to accomplish their specific goals, rather than try to decide WHICH goals were more important than others.
As it turns out, Ashok and Anita had enough income to be able to do both – they weren’t going to have to choose between paying parents back or being parents! We ‘topped up’ their tax brackets after what they needed for their own expenses, and that’s what was planned for repayment while they also saved in their Prof Corp.
But in my experience, the best planning doesn’t start after the money has changed hands.
It starts when parents (maybe that’s you!) are first thinking about helping.
One of the most important questions to ask isn’t how the funds will be repaid, but should they.
(That sounds weird, I know. Keep with me for a moment longer though.)
Are the funds needed for the parents’ own retirement security?
If yes, then the repayment plan should take that into account. Problem solved.
If no, then is it a (pre-gift) on money the children would eventually receive anyway?
Even if the funds aren’t needed for retirement security, some parents may still want to structure a repayment plan anyway. Maybe it’s about teaching financial responsibility, or maybe they want to protect their interests should their child’s relationship break down. Or maybe they just want to start out with a repayment plan, but intend on forgiving it a few years later.
The best planning should take place before adult children look at buying a home, so everyone goes into it with their eyes open. Adult children know how much and how soon to repay, and parents won’t feel like the bad guys for asking for payments to start.
(But if you or they plan on forgiving the loan, you might want to hold that back as a surprise, I’ll let you have that one!)
The best planning should take place before adult children look at buying a home,
so everyone goes into it with their eyes open.
The discussion between you and your parents, or you with your adult children, is often the most valuable part of the gift. It removes uncertainty, worry, guilt, and pressure, and let’s everyone enjoy the process!
Enjoyed this article? I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note! And make sure to check out my Amazon bestseller, The Doctor’s Handbook: 5 principles of wealth you weren’t taught in med school.
