Many parents believe it’s better to give their grown kids money when their children could use the cash rather than leaving it to them as an inheritance. But making such financial gifts can involve a distinct psychological downside: the potential for encouraging dependency that can develop if your adult children come to expect your help.
Even if you can afford to make regular cash infusions, you may be concerned about the potential for sapping your kids’ motivation to succeed financially. Regular checks engender regular expectations. If you write your kids a check annually three consecutive years, your generosity may become habit-forming for them.
I call this the Rule of Three. The first check is greatly appreciated, the second one is appreciated, but less of a surprise and the third is still appreciated. but no surprise at all. After the third time, they may come to expect a check every year.
3 Strategies for Financial Gifts to Grown Kids
As a financial adviser who has helped many clients make such gifts, I’ve found that these familial strategies work the best for the parents and their grown kids:
1. Keep it irregular.
Vary the time of year you send checks, and don’t send them every year.
While dependency stems from expectation, breaking things up creates doubt, reducing reliability and dependence.
2. Don’t always give money directly.
There are various ways to assist your grown kids indirectly. These include paying their uninsured medical expenses, helping out with a purchase by a grandchild (such as a first car), providing cash for a home remodeling contractor’s fees and covering some expenses for a first baby (such as a stroller, a car seat, a crib or a year’s supply of diapers).
Varying the impetus and circumstances of your assistance tends to make gifts unexpected and appreciated windfalls, instead of something recipients come to count on.
3. Confine your help to rare occasions.
For example, expenses for key anniversaries or birthdays could qualify. After all, how often does your daughter have a 10th wedding anniversary or her son have a 16th birthday? Another irregular impetus would be the need for plane fare and lodging to attend family reunions, assuming these events aren’t annual or bi-annual.
Another example: occasional family vacations for the extended family.
Of course, the Internal Revenue Service puts limits on how much you can give without tax consequences. Under current law, single people may make cash gifts to an individual totaling $14,000 a year without any tax liability for the recipient. Spouses each may give $14,000 a year to the same recipient, meaning a limit of $28,000 on each gift from the couple. (These figures or rules could change with tax reform.)
It doesn’t matter to Uncle Sam whether recipients are relatives; but check your state’s tax rules because they may be different. There are no limits on how many people you can give this amount to annually.
Since estates of $5.4 million and up are currently subject to federal estate tax (states limits vary), for some wealthy individuals, perennially giving away money over the long haul could be part of a plan to reduce the size of their taxable estates.
But even the wealthy may want find ways to keep this assistance unpredictable. That way, they can help their grown children without handicapping their self-reliance.