When to Give

Jonathan Clements

WANT TO DONATE TO charity? It usually makes sense to give now rather than upon death. You’ll get the pleasure of helping a cause you care about, and your generosity may also earn you an immediate tax deduction.

But what about giving money to your children or other heirs? This is a much trickier question, one I’ve thought about a lot ever since my first child was born almost 35 years ago.

Giving now. When I started reading about investing in the 1980s, I was immediately captivated by the idea of stock market compounding and how—if given enough time—it could turn modest sums into significant wealth. No doubt this was partly because I was in my 20s and barely getting by on a junior reporter’s income. A modest sum was all I could muster, but at least I had time on my side.

The magical combination of time and compounding seemed even more relevant to my two kids, who were born in 1988 and 1992. I set out to ensure they’d reap the rewards of compounding, opening accounts to help pay for a future house down payment and for their retirement.

At the same time, there was another notion rattling around in my head: I wanted Hannah and Henry to have a sense of financial security in their early adult years, something that had eluded me. And my plan worked. I remember Hannah calling me shortly before she graduated college in 2010.

Life was about to get all too real for her and her cash-strapped friends, as they contemplated the nitty-gritty of starting jobs and renting apartments. Hannah suddenly had an intense interest in her Vanguard Group account, which I’d been mentioning for years. “I can’t believe I have so much money,” she said, awed by her account balance.

In the years since, I’ve come to realize there are additional reasons to give money to your children early in their adult life: The dollars involved will likely be more helpful to them than to you, plus you’ll have the pleasure of seeing them enjoy the money. To be sure, there are also risks: The money could get squandered and it could dent their ambition.

Will that happen? The good news is, as a parent, you should have some sense for how your kids will handle your largesse—and you can also influence the outcome, by trying to teach them sound financial values from an early age.

On top of all this, there are some purely financial reasons to give away money now rather than waiting until death. You get the subsequent growth of those dollars out of your name, which could reduce the hit from federal and state estate taxes. It could also allow you to qualify for Medicaid, should you need help paying for a nursing home—a goal that might be important for those with modest assets who realize that paying long-term-care costs could wipe out their savings within a few short years.

After investing a fair amount in my children’s names when they were younger, I’ve been less generous over the past decade or so. But I’m rethinking that. I’m confident I have enough for my own retirement and I’m confident my kids would be responsible with any money I give them, plus I’ve been eyeing Pennsylvania’s inheritance tax, which would potentially snag a portion of whatever I bequeath. On the other hand, if I give them money now, it would likely mean pulling from my traditional IRA, and I’m not anxious to have that extra taxable income over the next few years, given my current focus on making large Roth conversions.

Giving later. If there are so many sound reasons for giving now, why wait until death? The No. 1 reason: You don’t want to hand over money you might later need for your own retirement.

But even if you can afford to give your children or other family members a healthy sum during your lifetime, you might still want to hang onto the money for the time being. For starters, you get to retain control of the money, which might be important if your kids have little investment savvy, or you worry about how they’ll use the gift, or you fear your children could lose a chunk to a divorce or a lawsuit. There’s also the big behavioral fear: You might want to ease your kids’ financial path, but not so much that they fail to develop good financial habits.

Moreover, depending on when you die, the lump sum you bequeath might arrive at an auspicious time, allowing your children to, say, pay off their mortgage or foot the bill for their kids’ college costs. It could also help them across the finish line to retirement or allow them to live somewhat more comfortably. A gradually rising standard of living over the course of our life can be a source of ongoing happiness, and your estate might make that possible.

To be sure, as some have noted, if the parents die in their 80s, their children may already be retired or close to it, so any inheritance might do little good. I think that’s a valid argument. On the other hand, an inheritance at that point may allow your kids to pay it forward to the next generation—or, alternatively, you could do that yourself, directing part of your estate to your grandchildren.

While compounding was a notion that captured my imagination four decades ago, “paying it forward” is an idea that captivates me today. As someone who has amassed modest wealth, my estate won’t allow my heirs to quit the workforce and lead a life of leisure, and—in any case—I don’t think that’s desirable. There’s great happiness to be had in striving toward goals we care passionately about.

But if used wisely, the money I bequeath could ensure the Clements clan remains firmly entrenched in the middle class for at least a few more generations, paying for decent educations and fending off financial misery. That might sound like a modest ambition. But it’s a legacy I’d happily have attached to my name.

How much financial help should parents give their children? Offer your thoughts in HumbleDollar’s Voices section.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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