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Family Finances

Spoiling the Grandkids

When my children were younger, their grandparents in New York kept a scrapbook of their favorite comic strips to read aloud when the kids came to visit. Meanwhile, theirPittsburgh grandparents sent them copious clippings about the Steelers, the kids' favorite football team.

Both sets of grandparents bought traditional presents as well, but it was those gifts of time and thoughtfulness that were most memorable. And that's worth keeping in mind this holiday season, when gift-giving by grandparents, well-intentioned and generous as it may be, can cause tensions on both sides of the generation gap.

Spirit of giving. In a recent survey by AARP Financial, 79% of the grandparents said that their grandkids don't understand the value of a dollar. (And they often say the same about their adult children. "We did too much for our grandchildren, and their parents didn't appreciate it," one unhappy grandmother complained to me.)

But grandparents can also be part of the problem. In the AARP survey, the typical grandparent had a median income of $46,000 and spent $600 a year on the grandchildren; grandparents with incomes of $75,000 or more spent more than twice that amount. Nearly 60% worry about spoiling their grandchildren -- and not without reason. As one parent told me, "I'm trying to teach my 13-year-old daughter that she can only spend what she has, but my in-laws always seem to sneak money to her."

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Yet grandparents do have a need to indulge their grandchildren. In the AARP study, more than 80% said they give because it makes them happy.

Buying guides. So how do you treat the grandkids without going overboard? And how do you encourage your adult children not to take your generosity for granted?

First, discuss big purchases with your children. They may not want Johnny to have a new video-game system, but would welcome a new computer. One grandmother limits gifts to $25. "The kids happily make their purchases or save the money, and in return I have their love, attention and time together."

Think college savings. This is a hat trick for all three generations: Mom, Dad and the kids get help with tuition, and grandparents get a multitude of tax breaks. You can open state 529 college-savings accounts for your grandchildren, and in more than half of the states and the District of Columbia you'll qualify for a state tax deduction.

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Plus, you can move money out of your estate -- contributing up to $60,000 (or $120,000 from both of you) at one time for each child and averaging the gift over five years -- while avoiding the gift tax and keeping control of the money. You can switch beneficiaries or get your money back by paying income tax and a 10% penalty on the earnings. And the federal financial-aid application doesn't ask about grandparent-owned accounts.

Finally, think investing. McDonald's gift certificates may make a great stocking stuffer, but how about giving kids stock in the company? Using a discount broker such as ShareBuilder (www.sharebuilder.com), which has a $4 fee, keeps costs low for small purchases. Or consider a mutual fund with a low minimum investment, such as Hodges fund ($250 minimum) or Homestead Value ($500). Custodial accounts aren't as attractive now that kiddie-tax rules have been tightened. But they're fine for small gifts or as a teaching tool. Cultivating a common interest with grandkids is a great way to turn them into investors -- or lifelong Steelers fans.