Do you remember the first time you received money as a gift on Christmas? It was probably given to you by a grandparent, uncle or aunt.
Remember how fascinated you were with the look, feel, and in my case, the taste of the money?
Over the years, many of my clients have asked me the best way to give gifts of money to their young children and grandchildren. I have seen plenty of mistakes made with perfectly good intentions over my 27 years in the investment advice business, and this is a perfect example.
I am by no means an expert at tax planning, charitable giving, or maximizing college financial aid packages. But I do know what works and what does not work in giving money to kids at Christmas.
As soon as my kids turned 10 years old, I opened a checking account for them at a local bank. In opening these accounts I use my child’s name and social security number.
These accounts include a bank ATM card so they can access the money in their bank account. This comes in handy for them in order 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 by babysitting, working for neighbors, etc. These bank accounts for my kids are truly their money.
Providing my kids with access to their own money has taught them 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.
Even for teenagers, all good things must come to an end. That is why I am going to intentionally become the financial Grinch in each of my children’s lives someday soon.
On the day before my children apply for any type of financial aid for college, I am going to make them withdraw every dollar they have in their bank accounts—and make them give all their money to dear old Dad.
You read this correctly. My kids will have absolutely no ownership of any financial assets the day they apply 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 over a number of years.
For generations, 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 educations savings plans.
These college savings accounts have been more about financial services companies gaining parent and grandparent money to manage for a fee than to financially benefit a child entering college.
Financial assets in a child’s name are the worst thing to have in order to potentially qualify for any federal financial aid for college. I have seen this scenario play itself out time-and-time-again over my years as an investment advisor.
Keeping money intended for a child’s college education in the names of the parents is the best investment move to make for middle-income families. There are some exceptions to this rule, but very few that I have seen work successfully.
If your child is fortunate to get money for Christmas this year, put it into Mom and Dad’s college savings or investment account…not in the child’s account.