I vividly remember the first time I received money as a gift on Christmas. That gift was given to me by my Grandparents.
That first Christmas gift of money was the first time that I ever saw money “in person.” I still remember how fascinated I was with the look, feel, and at the time, the taste of money.
Over the years, many of my retired Minnesota clients have asked me the best way to give a gift of money to their young grandchildren at Christmas.
Like a lot of things in the investment world, a little knowledge before a financial gift is made can save a great deal of time, effort, and frustration for everyone involved after the financial gift is made.
I am by no means an expert in tax planning, charitable giving, or maximizing college financial aid packages. But I do have some experience with the real life aspects of giving money to grandkids at Christmas.
As soon as my kids reached the age of ten, I opened a checking account for each of them at a local bank. Each of my kid’s name, and my name, were used to open the bank account. The accounts were opened using my kid’s individual social security numbers.
Their bank ATM card gives my kids access to the money in their bank account. The access to this money comes in handy for them to buy birthday presents for friends or family members, as well as the occasional “gotta have” video game or yoga pants.
At Christmas, I give my kids money to fund their bank accounts. All other times of the year, they put money in their bank accounts from babysitting, working for neighbors, etc. These bank accounts for my kids are truly their money with no interference from Mom and Dad.
Having their own back checking accounts has taught my kids how to budget, give to charity, and prioritize how they spend their money in their teens. These are all good financial lessons for the rest of their lives.
My kid’s bank accounts are nearing the end of their usefulness however. Next year, right before my current high school junior begins the college application process; I am going to intentionally become the financial Grinch.
On the day before my son applies for college, I am going to make him withdraw every dollar he has left in his bank account. And I will make him give the money to dear old Dad.
You read this correctly; my son will have absolutely no ownership of any financial assets the day he applies for college aid, tuition discounts or educational grants.
I have seen several cases where well-meaning parents and grandparents have sabotaged a child’s qualification for meaningful amounts of financial aid for college by saving money in a child’s name.
For several years the financial services industry has preached to parents and grandparents that saving for college was the right thing to do in UTMA, UGMA, Coverdell Education Savings Accounts and 529 educational savings plans.
The marketing of these types of college savings accounts has always been more about financial services companies gaining parent and grandparent money to manage for a fee than for any potential financial benefit to a child entering college.
Financial assets in a child’s name are the worst thing to disclose on a college financial aid application. By the time a high school junior and his or her parents sit down to fill out the college financial aid forms it is many times too late to redistribute a significant amount of the money held in a child’s name.
Grandparents should give serious consideration to gifting Christmas money directly to the parents of their grandkids. The larger the amount of the Christmas gift, the more serious consideration should be made. It should be then up to the parents to invest the money and to make sure that the money is available when college costs begin.
There are some exceptions to this rule, but very few that I have seen work successfully.
If the kids in your house are fortunate enough to get money for Christmas this year, put it into Mom and Dad’s college savings or investment account…not in the kid’s account.
Ric Lager
Lager & Company, Inc.
