‘The businesses each have two employees who manage the day-to-day operations’
“The businesses each have two employees who manage the day-to-day operations.” (Photo subjects are models.)
Dear Quentin,
I need some advice. My parents are gifting each one of my sons a laundromat (three sons, three laundromats). These businesses are well established and self-supporting – and provide a modest income every month. If sold, they would bring in about $500,000 each.
This is their inheritance. My parents are independently wealthy and don’t need these businesses at all. They want to ensure the businesses are always kept separate, and are never commingled with their future spouses. My sons are adults who have their own jobs.
The businesses each have two employees who manage the day-to-day operations. My sons are allowed to use that income every month for whatever it is that they need, with the understanding that they’re responsible for maintaining the business.
They grew up knowing that this would eventually happen. My parents want to give them this as they are winding down and want to free up their portfolio. They are going to do this with each one of their grandchildren, and my kids happen to be the oldest at this point.
I’m interested in solid advice regarding keeping the business separate, and not regarding my parents’ motivations for gifting.
Wealthy Parent
You can email The Moneyist with any financial and ethical questions at [email protected]. The Moneyist regrets he cannot reply to questions individually.
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Trusts, particularly irrevocable trusts, are another way to handle gifts with an iron glove and keep assets in the immediate family.
Dear Parent,
Your children are fortunate to receive such generous gifts.
There’s only so much control that their grandparents will be able to exercise after they’re gone, and the best kinds of gifts don’t come with strings attached. All inheritance is treated as separate property, unless your sons sell the businesses and put them into a joint bank account or commingle the money.
Commingling can sneak up on you when you least expect it. If one of your son’s spouses contributes to the business, for example, or if income/profit from the business was used to purchase marital assets, a divorce or probate court might rule that a share of the laundromat is marital property. Prenuptial (or postnuptial) agreements would help ringfence these assets.
Trusts, particularly irrevocable trusts, are another way to handle gifts with an iron glove and keep assets in the immediate family. “A trust allows you to dictate how and when your assets are distributed,” says the Nice Law Firm in Indianapolis. “You can specify conditions for beneficiaries, such as age requirements or certain milestones that must be met before they inherit.”
“A revocable living trust is one of the most common types of trusts used in estate planning,” it adds. “As the name suggests, a revocable living trust can be altered or revoked by the grantor at any time during their lifetime if their circumstances change, so long as they’re mentally competent.” Grantors typically surrender ownership of assets put in an irrevocable trust.
The latter could, however, help protect these laundromats from more than just daughters- or sons-in-law. “Depending on the type of trust, assets placed in a trust may be shielded from creditors, lawsuits, or divorce settlements,” the law firm adds. “This is particularly true with irrevocable trusts, which remove the assets from the grantor’s ownership.”
Irrevocable trust
With a properly structured irrevocable trust set up for the benefit of your sons, rather than transferring ownership directly to them outright, they would be beyond the reach of any challenge by their spouses, mainly because the trust owns the laundromats, not your parents or your sons. They are not marital property and do not figure in a divorce.
If your parents give your sons the laundromats while they are still alive, and they had bought these businesses for, say, $250,000, they would take that cost basis rather than receiving a step-up to the current market value of $500,000. If they later sold the businesses for $500,000, their capital gains would be based on that $250,000 basis.
The Internal Revenue Service should be kept in the loop, so your parents should file a Form 709. The annual gift exclusion is $19,000 per recipient (for 2025) or $38,000 if the gifts are made by a married couple; those gifts above that simply reduce your lifetime exemption (currently $13.99 million).
They are obviously wealthy, but others make gifts to loved ones to reduce their assets. If you require long-term care within the next five years, gifting property could affect your Medicaid eligibility due to the federal five-year “lookback” period. From an administrative standpoint, gifting property appears simpler. But inheritances have an edge here, too.
One more piece of unsolicited advice (sorry): If you are sensitive to opinions on the motivations of your parents giving your sons such generous gifts, it wouldn’t hurt to keep these transactions private. People may appear happy for you on the face of it, but they may not be so generous when your sons are out of earshot, especially if friends, family or acquaintances need money.
Never make such decisions without seeking tax advice.
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-Quentin Fottrell
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