I have three amazing children, plus five grandchildren. My husband and I are in a position to help them financially, but we want to be smart (and fair!) about it. I often hear that today’s young people are overly dependent on their parents, but I think they are facing a tougher road. What do you think?
Your question resonates with me because I have always known my family was there for me—not just my parents, but my grandparents, too. In fact, our family has a long tradition of one generation helping the next, especially when it comes to education, a first home or a business venture. Personally, I heartily endorse this spirit of generosity and want to continue it for my own children and future generations—provided, of course, they stay engaged with their finances and also learn to stand on their own two feet.
That said, like you, I often hear contradictory opinions about today’s younger generations. Are they overindulged, or do they really face greater financial challenges than previous generations? Let’s take a look.
A reality check
The impact of inflation has certainly muddied these discussions, so let’s tackle that first. The issue is complicated by the fact that inflation hasn’t affected all goods and services equally. For example, when we compare inflation-adjusted prices today with prices 40 years ago, some things, such as milk, eggs or even a television, have become less expensive on a relative basis, while other items, such as gasoline, bread and coffee, have stayed pretty much the same. But big-budget items like college or a new home—precisely those things that can help build a prosperous and healthy life—have increased dramatically, as demonstrated in the table below. So to my mind the picture is clear: Young families are definitely facing a tougher road than previous generations.
Lead with your values
So what is the best way for a parent or grandparent to help? Personally, whenever I’m facing a financial decision, I start by going back to my core values. If you’re like my grandfather, who believed a solid education was the foundation of a successful life (and therefore went on to finance college not only for his grandchildren, but for many others as well), you can start there. Or perhaps you place a higher value on launching a business, traveling the world or having a comfortable family home. Fortunately, the possibilities are just about endless—and that’s where it gets fun!
You also say you want to be fair in the way you help your children. Once again, opinions will differ, but to me “fair” nearly always means “equal.” One child might currently have a greater financial need than another, but circumstances often change. So unless you have a good reason to believe that a disparity is likely permanent, I would encourage you to provide each family (or individual) with equivalent support.
Just to be clear, this doesn’t mean you need to provide each child or grandchild with exactly the same gift. One family might need money for a first home, while another might benefit more from college funds.
Match your accounts to your goals
Once you’ve focused your support, it’s also important to pay attention to how you structure your gift.
- If you decide to create college funds for your grandchildren, a 529 plan has many benefits worth considering. Not only does it provide federal tax-free growth and tax-free withdrawals for qualified expenses (as well as tax-deductible contributions in some states), it also carries a special gift-tax exclusion: You can contribute a tax-free lump sum of up to $70,000 ($140,000 per couple) by electing to treat the gift as though it were spread evenly over five tax years.2 In addition, you can contribute up to $200,000 per beneficiary—and if the beneficiary doesn’t deplete the account or chooses not to attend college, the funds are transferable to other family members.
- A custodial account is another popular choice, but I often warn against depositing large sums for two reasons. First, a custodial account doesn’t have tax advantages. Second, the funds become the property of the child when he or she reaches legal maturity. However, a custodial account can be a useful tool for incidental support.
- Alternatively, if you are considering a larger gift to a minor that won’t be accessed until sometime in the future, you might want to consider a Crummey trust, which allows you to transfer wealth to your children during your lifetime without incurring gift taxes, assuming the amount is equal to or less than the annual gift-tax exclusion.
Share your wisdom
Talk openly with your kids about the financial challenges you’ve faced, where you’ve stumbled and how you’ve succeeded. Explain the basics of saving and investing. And, above all else, help them to understand that money is only as valuable as the opportunities it can provide. And best of all? In the not-too-distant future, they’ll be in a position to pass along this wisdom to their own kids.
Carrie Schwab-Pomerantz (@carrieschwab), CFP®, is president of Charles Schwab Foundation and senior vice president of Schwab Community Services at Charles Schwab & Co., Inc.
1Marjorie Smith Mueller and Robert M Gibson, “Age Differences in Health Care Spending, Fiscal Year 1975,” Social Security Administration, 1976; U.S. Department of Health and Human Services, “Health, United States, 2015: With Special Feature on Racial and Ethnic Health Disparities,” 2015.
2In 2017, an individual can gift up to $14,000 a year to an unlimited number of people, without tax or reporting requirements.