Following on from yesterday’s blog which featured our first ‘top tip’ for clients looking to pass money on to their children, today we continue with tips numbers 2 and 3:
Give children some money and see how they get on with it. This might be a monthly amount or an annual gift. Don’t place any restrictions on the money, just sit back and see how they deal with it.
“If you like the way in which the child deals with the money he or she has received, you may be happy to advance more. Alternatively, you may not!”
Joline Godfrey, in her book Raising Financially Fit Kids, proposes a slightly more structured approach, suggesting that whatever is given to the child, part must be saved, part must be used for charitable purposes and only the balance should be made available to spend freely.
If you like the way in which the child deals with the money he or she has received, you may be happy to advance more. Alternatively, you may not!
Many parents now agree that handing over a large amount of money to a child at age 21 is not a good idea and are holding off providing gifts, directly or via trusts, to ages 25, 30 or even older. Judging when your child is going to be mature enough to handle the money is not easy, so being flexible, or cautious, may be the best policy.
Some parents tie gifts into success or milestones. These might be gifts from the parent directly, it may be in the form of benefits from the family business (increased salary, bonus or shares), or it may form part of the conditions relating to a distribution from a trust.
In the US one such condition is called an ‘investment banker clause’ under which the trustees agree to pay out an amount from the trust equal to the beneficiaries’ income, creating a strong incentive to work hard (or, at least, strive for high earnings). Other incentives might be to pass exams (school, university or professional), but families can dream up whatever incentives they think are appropriate.
Our next tips, 4 & 5, will look at the art (and business) of giving.
Richard Wadsworth is a Chartered Financial Planner at Carbon. Contact Richard via email on email@example.com or get in touch with your local office.
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