Question: I'm retired and comfortable, and want to give each of my three grandkids $5,000 for Christmas, but their parents don't want them to blow the money. How should I handle this?
Answer: As rewarding as it can be to raise children of your own, take a survey of older Americans, and they'll probably agree that watching their grandchildren grow up is equally rewarding, if not more so. There's just something special about the relationship people have with their grandchildren.
If you're retired and financially comfortable, you may be inclined to shower your grandkids with gifts or treats from time to time. That could mean a trip to the ice cream store after dinner or slipping them the occasional $20 bill for extra spending money.
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Small gestures like these may not be too controversial. But you may need to tread cautiously if you're looking to give your grandchildren larger financial gifts.
With the holidays coming up, you may be considering a $5,000 gift to each of your three grandchildren. Maybe you have a required minimum distribution coming due and you don't have another use for the money. Or maybe you've budgeted strategically to be able to write those checks.
While your grandchildren might truly appreciate such a generous gift, their parents may not be as thrilled. They may be concerned that their children will waste the money, or they might simply object to a gift that large. Here's how to navigate the situation so your attempt at generosity doesn't turn into a holiday conflict.
Respect your own children's wishes above all else
The nice thing about being a grandparent is that you get the joy of spending time with your grandchildren without having to be responsible for their care and upbringing. But because it's your own kids who are tasked with raising your grandchildren, it's important that you respect their wishes when it comes to important issues like handing over a large sum of money, says Adam Spiegelman, founder and wealth adviser at Spiegelman Wealth Management.
"When a grandparent wants to gift money and the parents are hesitant, you absolutely have to defer to the parents," he says. "They’re the ones raising the kids, and it’s ultimately their decision."
However, Spiegelman says, if your own children understand that you have the best of intentions and that you're willing to be flexible, there may be a pretty easy way to reach an agreement.
He suggests listening to your children's concerns and figuring out if there's a way to work around them. That could, for example, involve giving the money to your children to manage.
"A custodial account, for example, allows the grandkids to be involved without having full control," Spiegelman explains. "And it opens the door to conversations about investing, saving, taxes, compounding — all the financial basics that most kids aren’t getting in school. If the goal is to help them, that structure often goes a long way."
Present the money as an opportunity
Your children may be concerned about their kids blowing the $5,000 checks you hand over. But rather than look at that gift as a liability, help your children see it as an opportunity.
"Parents often feel their kids aren’t responsible enough. And sometimes, they’re right," says Mary Clements Evans, financial adviser and founder of Evans Wealth Strategies. "That’s why we focus on educating the next generation to become good stewards of the money they receive."
Evans suggests that instead of handing $5,000 to each grandchild, consider contributing the money to a 529 plan for their education.
"Funds can be used for K to 12 education, college, or trade schools," she explains. And if they don't end up needing all of the money for education, leftover funds can later be rolled into a Roth IRA for retirement savings.
Spiegelman agrees and says that a $5,000 gift can be used to teach children about investing from a young age.
"If the kids love a certain brand … you can use that interest to teach them what owning a stock really means," he says. "Kids aren’t learning this stuff in school. A structured gift is a chance to teach investing, compounding, and real-world money skills."
Turn it into a lesson in money management
If you're willing to partner with your children to help your grandchildren make the most of a $5,000 gift, you have a prime opportunity to teach them about the importance of budgeting, says Scott G. Kyle, CEO/Chief Investment Officer at Coastwise Capital Group, LLC.
"Parents and grandparents can help kids apply the 50/30/20 rule," Kyle explains. This popular strategy allocates 50% of earnings to needs, 30% to savings, and 20% to wants.
In this case, the 50% needs portion could, depending on the child's age, be a down payment on a first car or a laptop for school work. If the children are much younger, the 50% needs portion could go into a savings account that can be accessed upon high school graduation.
The 20% savings portion, Kyle explains, could go into a brokerage account so the grandchildren can invest for their future. And the 30% wants portion can be for fun.
The key, either way, is to make sure your own kids are on board.
"Some families already have systems or philosophies they’re teaching," Spiegelman says. "Start with the parents’ philosophy. Once you have their buy-in, the gift becomes a tool, not a conflict."
Read More
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