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 "What if I ran out and bought a car with it?" he asked.
It was mostly a joke question, but still heart-stopping for
Kirchenbauer, a financial planner in Arlington, Virginia, because
she knew he could do exactly that if he wanted to - and it would be
perfectly legal.
There is a jarring lack of parental control when high school and
college seniors come into some cash upon graduation - anything from
a $100 check from Grandma to multi-million dollar inheritances.
"You have to go for less of a parenting, finger-pointing mode and
talk to them as an adult - that's what they are now," says Rachel
Cruze, who co-authored the book "Smart Money, Smart Kids" with her
father, financial guru Dave Ramsey.
Mostly, good things happen with the money. According to college loan
purveyor Sallie Mae, about 25 percent of parents say that at least
some high school graduation gift money ended up paying for college
expenses. A 2010 poll for the National Endowment for Financial
Education found that 25 percent of recipients put money into
savings, 10 percent used it for travel and entertainment and 5
percent put the money toward a car.
While it's still a little scary for parents to lose control, here
are four strategies to make sure that new young adults handle
graduation gifts responsibly.
TEST WITH SMALL AMOUNTS
Many parents try to teach their kids healthy spending habits with
allowances, which pays off when they hit young adulthood. Jill
Tottenberg, mom to a high school senior in New York City, started
her daughter off with $5 a week in third grade, then upped it to $80
a month in high school.
Now, the 18-year-old has a bank account with a debit card and is
learning to manage a credit card. Mom is pretty confident that any
graduation gifts will go straight in the bank. "She totally gets
it," says Tottenberg.
John Boland, a financial planner in Montpelier, Vermont, also has
tested his 17-year-old near-graduate with a debit and credit card,
necessary because the teen is on a travel sports team. "He knows
that if he does anything foolish, he'll lose it," Boland says.
This past winter, when Boland's parents asked their grandson what he
wanted as a Christmas present, he said cash for college in the fall.
ROLLOVER INTO A TRUST
When higher dollar amounts are involved, young adults face pressure
from families and financial advisers to lock the money up,
especially for minor accounts that turn over to the child at age 18
or 21, depending on state law.
"I've had some of my clients say: 'Can we not give him the money?'"
says Kevin Ruth, head of Private Wealth Planning for Fidelity. "The
reality is, you can't."
Matt Brady, senior director of planning at Wells Fargo Private Bank,
says he has seen parents convince children to roll their newly
acquired funds into a family partnership or trust, so they can
continue to oversee it.
"The worst thing is to just have them take control of money they
can't manage," Brady says.
For money in trusts, it all comes down to the provisions for
distribution. Many of them set limits preventing the youngsters from
getting anything unless they complete tasks, like graduate.
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Fidelity's Ruth says the trend is to keep the rules as restrictive
as possible.
Incentives are crucial, he says. "You can get money if you start a
business or get a masters degree. A lot of times, they can only get
out as much money as they earn. They have to show up with a W-2,"
Ruth says. "And if you're not doing the right thing, you will get
zero money."
The cost of setting up a trust with an estate attorney will depend
on how much money is invested, and ongoing professional money
management will cost an annual fee of around 1 percent of assets.
ALLOW A LITTLE SPLURGE
For Tim Noonan, managing director of capital market insights for
Russell Investments in Seattle, Washington, the key to his financial
parenting was instilling a sense of mystery about the power of
money. The message: "Money is a magical tool, but it will turn
against you if you do the wrong thing."
While he doesn't expect his daughter to get a lot of cash gifts when
she graduates this month, he was willing to shell out for a
celebratory present. She asked for a party for all her friends,
which he was happy to do because she already has a job lined up.
Tottenberg, the New York City mom, is expecting her daughter to be
responsible but also allowing for fun. "She may buy some shoes or
some ridiculous gift pack from Sephora that is all pretty packaging
- something she knows I'll never buy for her," she says.
DIRECT GIFTS FROM FAMILY MEMBERS
One stealth way to maintain a little control over funds is to direct
family members toward appropriate non-cash gifts. This is what
Kirchenbauer, whose son has the $60,000 college fund, is doing when
family members ask what her son would like for graduation. To one
she suggested a set of luggage, to another a suit, and to a third a
laptop.
"My mom is just writing a check," she said, which she hopes her son
will put in a savings account.
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Lauren Young and Dan Grebler)
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