27 Jul 2021
A guide to gifting money to your children
By James Goodman
There comes a time in the parental journey when your love and support include the gift of money.
There’s the ‘teenager phase’, which might begin at age 12 with ‘Here’s $5 for a milkshake’. Then comes the ‘adult child’ phase, when our children are adults, where the purpose and quantity of financial gifts can vary enormously, as can the age of the recipient. The ‘legacy phase’ is when there is often a sizable gift upon your death through your estate, when your children are (say) 60 years old.
In this guide, I focus on establishing some key issues parents should consider when gifting to adult children.
A tale of two families
Consider these two opposing family stories about the Brown and Jones families.
The Brown family
Mr and Mrs Brown, a wealthy couple, wanted to be sure their son Andrew made his own way in life. The Browns were focused on Andrew becoming independent and held a view that having his own struggles was the best method. Andrew never received pocket money for chores or had his crooked teeth fixed. The Browns didn’t contribute to Andrew’s wedding or first home, and didn’t help him out when he had a financial crisis.
Eventually, Andrew inherited a small fortune from his parents. He said to their estate lawyer ‘When I really needed some money it wasn’t there. I’m 60, what am I going to do with it now?’
The Jones family
Mr and Mrs Jones had serious financial struggles when they were young, and were keen to make sure their daughter Alison didn’t suffer like they did. For the Joneses, financial support for Alison meant making her life easier and better. Alison always lived with her parents rent free, and since her university days the Joneses have also supplied Alison an allowance. Perhaps subconsciously, Alison became accustomed to guilting her parents into paying for things like a holiday with friends and the latest iPhone.
Alison is now 33 and has not held down a job. Mr and Mrs Jones are worried about her progression in life, and about their own finances. At this rate, they can’t see themselves ever being able to afford to retire.
Some guidelines
These stories of parents with the best of intentions highlight some of the key issues to consider when gifting to adult children.
Affordability
It isn’t good for you or, in the end, your children, if you run out of money later in life. Before giving money away you should consider the impact on your own finances. Make sure you think through and record your current and future goals, with a margin for safety included. Action: Ask your financial adviser – ‘Can I afford this gift?’
Be equitable
The level of financial support between siblings is often equated with the level of parental love. The default guideline is to make the same gifts to each of your children, regardless of their individual resources. The gift timings don’t have to be the same, so long as a record is kept and the final amounts are even. Action: Record any (uneven) previous and current gifts?
Give when it’s of benefit
This one is difficult to set guidelines for. On the one hand, gifts to young adults have a greater risk of making life too easy for them, but on the other hand, gifts to older adults might be too late to do any good. Offering help at the most financially stressful times in life can be a good consideration, such as buying a first home or when there are multiple children at private school. Action: Before committing to a gift ask yourself – ‘Will this make their life too easy?’
No strings attached
Providing guidance and sharing your own experiences is great. After all, sometimes the conversation will end up being more value to them than the money. But take care not to over-reach, because emotional strategies or having strings attached are almost always unhelpful. In the end, it is best to let them find their own way and retain their independence. Be prepared that they might choose to use your ‘first home’ gift to buy a better home, start out with a lower mortgage, or simply take a grand holiday! Action: When giving, be clear – ‘It’s up to you how you use the money’.
Watch out for requests
If your 18-year-old daughter calls poor from her four-month backpacking adventure, perhaps don’t worry too much. If your 30-year-old son requests an ‘emergency’ bail-out every two months, it is time to rethink whether your support is helping or hurting. If you realise it’s time to pull them off the financial teat, a good first action could be to communicate clearly why it’s better for them, and allow them some time to get prepared before D-Day. Action: Ask your spouse or yourself - ‘What requests have we received?’
A final suggestion
Of course, there are circumstances where the above guidelines don’t work and there are additional issues to consider. An open discussion with your spouse and/or someone of experience is often a good place to start. An open discussion with your adult child might be the best place to end.
If you need assistance with working through the issues when gifting to your adult children, I am very happy to help.