When I'm asked, ‘What is the right way to gift money to children?’ I start out with a personal anecdote of how not to do it.
You see, I’ve been guilty of attaching strings to money going to my children – something I regret doing.
My mother in-law passed away in 2002 and left a small inheritance to our four children, of $1,000 each.
Before her passing, I asked her if she had any regrets in life. There weren’t many, but the one that caught my attention was that she wished she had been more financially savvy.
So I decided to put some savvy into how I would pass her gift onto my kids, and thought a win/win situation would be to put a condition on their inheritance.
I did ask my mother how she felt about it, and she supported the plan. I offered to match her inheritance if the children read a book I had written for them on financial literacy, called “You + Investing = Success”. They had a three-month period to read the book and successfully answer three financial questions asked by me.
Fast forward: All four read the book, passed the test and gratefully accepted the money. Had they not read the book they would have received the inheritance, but not the match.
When placing conditions can go wrong
All too often I see families wanting to help out their children, and often with good intentions, they end up putting conditions on the gifted money.
But, in many cases, the children have not asked for the money -- and often find it hard to accept the conditions imposed on them. Sadly, what can happen is that conflicts arise, emotions come into play and it’s no longer just about the money.
Some of those conditions I’ve seen involve keeping the money outside a joint bank account, for fear of marriage failure and the funds being subject to equalization. Parents see their children struggling financially and yet might be uncertain about their own financial stability. The result -- they gift money today with the caveat they may want it back tomorrow. And we’ve all heard the advice to never lend money to a family member or friend, because trying to collect could prove to be messy.
In fact, you probably should never lend or gift money that you can’t afford to lose.
Gifting money is a wonderful thing to do, especially when so many are struggling to make ends meet. So, what to do? Here’s what I suggest you consider:
1) If positioned as a gift, then it is a gift, and no conditions on how or what the receiver should spend the money on should be placed.
2) If you insist on placing conditions, then the wording is critical. For example: “I will lend you this money if you put it towards a home.” The receiver then gets to decide if that is in fact what they would want to do with the money. They may not want a home at this time, and the gift for that purpose is not appropriate. But you made your condition clear from the get-go.
3) Keep in mind there are no tax consequences if you gift money to an adult child. Attribution rules only kick in if the children are minors and any income or dividends will then be attributed back to you, and you will be taxed accordingly.
4) Gifting should not be a reason to get around probate. Probate costs are relatively small in comparison to the financial challenges that could happen when you are no longer here to smooth the waters.
Now, getting back to my anecdote. Why do I regret my gift-giving conditions to my children? The values instilled in them should have been a consideration, which far out-weighed the financial windfall. It only muddied the waters when the focus was on financial literacy over their grandmother’s legacy. A gift should be a gift, with no strings attached.
At the end of the day, it’s your money and you get to do with it what you would like, but the recipient should also get the opportunity to respond in way that they like. Money is emotional, but it will never love you back.
The turmoil around conditions where there is a value misalignment can tear a family apart, even when intentions are good.