Money gifts can be both a blessing and a curse depending on the age of the recipient and the money personalities of the parents and their offspring. While clearly an infant has no say in what happens to funds given in honor of her birth, older children may balk at having their gift cash controlled by their parents.
"Parents need to train their kids as they're growing up, giving them a chance to make mistakes as well as the tools to help them learn from those mistakes," says Ellen Miley Perry, a wealth management advisor with Wealthbridge Partners in Washington, D.C., and author of "A Wealth of Possibilities: Navigating Family, Money, and Legacy." "If you've controlled your kids too much and they get a cash gift when they're old enough to control it themselves, it's like handing your car keys to a kid who's never learned to drive."
Perry says more affluent parents have a tendency to bail their kids out rather than letting them take the natural consequences of making a mistake with their money. But parents in families without a lot of money have an even harder time letting their kids control their own cash.
She recommends making the effort to not place your own emotional baggage about money on your kids. "It's hard to step back and let your kids make mistakes, but if you don't, you're taking the ability to learn out of the equation," says Perry. She recommends "Raising Financially Fit Kids" by Joline Godfrey as an excellent guide to teaching your kids about money.
Of course, it's one thing to let your kid blow a hundred bucks and quite another to watch them fritter away thousands of dollars of bar mitzvah dough.
Teach Your Children Wealth
Guy Penn, principal of G.M. Penn Wealth Management in O'Fallon, Mo., says the true gift of a monetary windfall is the opportunity for a teaching moment. "The process of prioritizing and discussing the various options is a gift more powerful than the actual funds being given," he says.
Penn recommends that parents list various options for gift funds into "buckets" such as short-term saving for fun and long-term saving for a car or college and then craft a plan together on getting there.
The exact age when a child is ready to participate in investment decisions depends on your offspring's money personality and skills. You need to bear in mind the financial maturity of the child.
Rich Arzaga, Founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., says that up until a child is 10 years old, parents should make all the investment decisions, based on their goals, risk tolerance, and time horizons. "After age 10, parents have an opportunity to include their children in how their money is invested. This can even turn into a family meeting."
Arzaga says that you can demonstrate how different types of investments work. Parents can suggest using a few different mutual funds, such as a bond fund, a large company fund, a small- or medium-cap company fund, and an international fund.
"The goal here is to learn how these different accounts act under different market conditions," says Arzaga. "This will allow children, and their parents, to learn that to some extent they can choose risk and potential reward based on the type of fund they choose. After age 10, and certainly by age 14, children appreciate this discussion, and seeing their own money move up and down."
Arzaga says the key is to keep your cool as parents when responding to up or down markets. "The goal is to remove as much of the emotion out of the investment process as possible," he says.
Teaching Fiscal Responsibility
Parents are the guardians or custodians of the money in different types of accounts, and legally have full control over most types of accounts until the child comes of age, typically at 18 or 21, depending on the state. "In fact, parents should view this as a fiduciary responsibility," Arzaga says.
One important exception is 529 college savings accounts, where the adult owner has the control and the children are simply the beneficiaries, Arzaga says. While most 529 accounts are owned by parents, grandparents or other relatives may open them as well.
Earnings in accounts under the Uniform Gift to Minors Act and the Uniform Trust to Minors Act are taxed to the minor, but up to $1,000 of the earnings are tax exempt. Up to $14,000 annually in gift transfers into these accounts and into 529 accounts are excluded from taxes.
Most banks offer special savings accounts for children with minimal deposit and balance requirements. You can also open joint accounts with your minor child, including a CD or checking account.
Become the Bank of Dad
Arzaga introduced his daughter to investing at an early age and matches her investments from what he calls "The Bank of Dad." He says that the out-of-pocket cost is a small price to pay to teach his daughter the long-term habit of savings.
Taking a collaborative approach rather than a controlling approach to financial gifts can set your child on a path to financial security.