My father-in-law wants to give us $1 million to wipe out our mortgage – should I accept or prove I can do it on my own?

People who pursue a FIRE (Financial Independence Retire Early) philosophy aggressively save and invest with a goal towards retiring young enough to enjoy the freedom that such a bounty would afford them. A fatFIRE adherent is one on track to accumulate a 7-8 figure retirement nest egg. When a couple’s in-laws share their fatFIRE pursuits, this can make for a harmonious relationship. However, when good intentions can involve sizable financial gifts to stay on that course, the relationship balance can be affected, unless the proper level of diplomacy and commonly shared strategies can prevail.

When Large Gifts Can Pose Future Issues

A fatFIRE business owner and his wife have decided to move to a larger and more expensive home. The wife’s parents, who are also fatFIRE adherents, have offered the couple a $1 million gift with the express purpose of paying down the mortgage in order to minimize debt load. The husband, who is the sole breadwinner and earns 7 figures annually, posted on Reddit in order to get a better perspective on his in-laws’ mindset and what strategies could be suggested to either accept or reject the offer while maintaining a harmonious relationship. The details are as follows:

• The couple plan to sell their $1 million home. They have already made a down payment on a new, larger $3.5 million home and have a mortgage.
• Upon the sale of the $1 million home, the plan was to invest the proceeds in the market.
• The Parents in-law have a net worth close to $10 million. They are also fatFIRE, and extremely debt averse, as debt is the major obstacle to wealth building and a fatFIRE strategy.
• The In-Laws have offered $1 million to match the $1 million sale proceeds to go towards reducing the mortgage to $800,000. 

On the pro side of accepting:

• A $1 million gift would relieve the stress of a $3 million mortgage.
• The In-Laws view the gift as giving their daughter part of her inheritance early, since she is an only child and their sole heir.
• As the In-Laws are so debt averse, accepting it will give them some peace of mind over their daughter’s, son-in-law’s and potential grandchildrens’ financial security.
• The pandemic prevented the in-Laws from attending a number of family milestones, and the couple thinks that the gift offer is a way to show their support in absentia.
• The In-Laws are relatively conservative investors, so the $1 million would be put to a more effective use than barely staying above inflation invested in Treasury Bonds. 

On the con side of accepting:

• There is an ego component to “doing it on their own” from the poster.
• The In-laws have such ingrained habits of frugality that the poster wife feels that her parents should splurge more on themselves, now that they have the means and are still in good enough health to enjoy it. 

Financial and Family Strategies

Clearly, the pros outweigh the cons in this scenario, and there are several innovative strategies that can be deployed to take advantage of tax exemptions and timing to expedite the gift in the most efficient fashion.

Avoiding the Lifetime Gift Allowance: Taking advantage of the annual gift limit of $19,000 per recipient before triggering the Lifetime Gift allowance or the annual gift tax threshold, one suggestion came back from a respondent would work as such:

• The Father-in-Law and Mother-in-Law each give $38,000 ($19,000 to the poster and their daughter) for $76,000 per year.
• Mathematically, repeating this process for the next 20 years would allow for the mortgage payments to be reduced, without triggering the Lifetime Gift Allowance.
• As the total allowance for the in-Laws would probably be north of $20 million, the entire $1 million could likely be given without a drastic Lifetime Allowance balance impact. 

Grantor Retained Annuity Trust: A GRAT is a type of irrevocable trust that allows the grantor to pass a sizable sum to a beneficiary of the next generation without or with very minimal gift tax. This is another structure that the in-laws could consider.

Parents Room: If the couple plan to have a guest bedroom in their new, larger house, that could be designated for the in-Laws, and maintain the harmonious relationship by letting them know that they are always welcome in their home.

This article is written purely for information purposes. Anyone seeking more comprehensive information should seek the counsel of a financial professional.

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