While many parents are of a mind to give their grown kids money today as opposed to leaving it to them as an inheritance in the future, many experts caution that by making such financial gifts they run the risk of encouraging a cycle of dependency that's hard to break. Indeed, many POGOs have told me they are still giving handouts to, if not wholly supporting, "kids" in their thirties, forties, and beyond. The experts say that even if you can afford these gifts, by making them you may be sapping your offspring's motivation to work hard and succeed financially, which is the opposite of their intended purpose. In other words, there's no such thing as a free lunch—either for your adult children or for you.
According to Nashville financial adviser Trey Smith, "Regular checks engender regular expectations. If you write your kids a check annually three consecutive years, your generosity may become habit-forming for them." In thinking about this issue, Smith has devised what he calls 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."
Smith has also come up with three strategies for making financial presents to your adult children:
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.
Whether you can give the money without tax consequences to the recipient is beside the point as, in my opinion, is the desire to reduce the size of one's estate to mitigate inheritance taxes. Even if you were rolling in dough, the experts would tell you to keep your assistance unpredictable. By doing so you will be doing your children a great favor by helping them develop self-reliance.
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