Helping Wisely

Adam M. Grossman

LIFE IS EXPENSIVE—especially for young adults contending with budget busters like housing and tuition. If you have adult children facing these expenses and want to help them financially, you may be wondering what’s the best approach. While every family is different, below are three principles that I’ve seen work well.

1. Transparency. This applies in several ways. First, you should let your children know your objectives for these gifts. Do you want to see them spend it on something specific—such as a home down payment—or are they free to use it as they see fit? If they use the funds in a way that seems frivolous to you, is that a problem or is that entirely their choice? There’s no right answer on this, but it’s important to set expectations.

Another aspect of transparency: While you don’t have to share your entire balance sheet, it helps to let your children know how gifts today might relate to any future inheritance. That’s because children can draw very different conclusions from the gifts they receive. On the one hand, generous gifts might be an indication of a substantial inheritance down the road. But on the other, generous gifts might result in very little being left at the end. From a child’s perspective, it’s impossible to tell the difference. Children may not be entitled to this information, but they’ll sleep easier if they aren’t constantly wondering.

2. Predictability. I’ve observed three approaches to giving: one-time gifts, regular annual gifts and periodic, unscheduled gifts. In my opinion, the first two work well, but the third should be avoided. Why? Kids are grateful for any assistance. But everyone likes to be able to plan. For that reason, I recommend being as predictable as possible.

If you go the route of a one-time gift, let recipients know they shouldn’t expect more. Alternatively, if you want to start giving annually, set expectations as clearly as possible. Tell children, for example, that they’ll each receive $5,000 every New Year’s Day and they can count on that. Obviously, you’ll want to pick a number you know you can afford more or less indefinitely. That’s why I’d start with a reasonable sum. You can always increase it later, but you want to avoid ever having to decrease it.

As I noted a few weeks ago, I think it makes sense to go slow with any gifting plan. This will allow you to see how things are working and give you a chance to adjust course before increasing the amounts.

Another reason to be consistent and predictable: These aren’t just financial transactions. Adult children interpret gifts as an expression of parents’ feelings toward them. This might seem surprising, but I’ve seen more than one case in which arbitrary gift amounts caused undue stress for recipients. When a gift is higher than expected, the recipients might spend the next year wondering if they’ll receive that same generous amount next time. On the other hand, if a gift is smaller than before, the recipients might wonder if they did something to upset their parents. I have seen all of the above, and it’s not pleasant. Fortunately, it’s easily avoided.

3. Equity. Suppose you have two children. One is a schoolteacher and the other a brain surgeon. If you’re making gifts, should they be treated equally or instead treated according to their needs? When there’s a wide disparity like this, it might seem silly to treat them equally. In fact, the brain surgeon might be happy to see the schoolteacher treated more generously. But this is an extreme example. In most cases, the differences aren’t as stark—and it might not be easy to judge other people’s needs.

Consider two brothers, one earning $300,000 and the other $75,000. At first glance, parents might assume the higher-income child needs no help and that gifts should be directed only to the brother with more modest means. But the numbers might surprise you. In this example, all else being equal, the higher-income child would pay $54,000 in federal taxes, while the lower-income sibling would pay just $5,600. And if they each have a child in a private college, the higher-income family might pay full freight—about $78,000—while the lower-income family would pay just $5,750. The result? The higher-income family will, of course, still have more disposable income. But after paying nearly 10 times more in taxes and 13 times more in tuition, the difference might be less than you’d assume.

Differences in income are just one way in which families’ needs can differ. What if one child is unmarried while another has several children? Or maybe one child lives in a more expensive city than another? As you can see, it quickly becomes a minefield to assess other people’s needs. But perhaps most important, high-income children have feelings, too. As parents, we might feel we’re doing the right thing by helping the child with greater financial needs. But again, these aren’t just financial transactions. That’s why I think the best solution is simply to treat children equally.

While I think equity is the best policy, I want to be clear: This is a guideline and not a rule. There are many cases in which it will make sense to do things differently—if one child has special needs, for example. But if you do, I would again stress transparency. Let everyone know the plan.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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