The Art of Receiving a Financial Gift

At a conference several years ago I met an estate planning attorney who was telling me about a young client that had inherited wealth from a trust.  According to the provisions of the trust, the young man was allowed to have $500,000 on his 25th birthday.  He arrived in the attorney’s office, with an entourage of eager friends, and collected his check.  The first thing the young man did upon leaving the attorney’s office was visit a luxury car dealership where he purchased a Mercedes and a BMW.  Then he lived the lifestyle of the rich and famous (with a little help from his “friends”) until it was all gone, which took six months.

Many of my clients give financial gifts to their children and grandchildren.   There are estate planning benefits, but most importantly, they want to give the subsequent generations an “edge” that they didn’t have in the creation of long-term wealth.  They want to see the subsequent generations attain at least their level of financial success, or ideally, much better.

There is an art to receiving a financial gift.  Each person’s situation and stage of life is different, but generally speaking, if you are receiving a financial gift from your parents, grandparents or a trust, there are good, bad and ugly uses for the proceeds.

Here are a few of the bad ways to use gifted funds:

1. Buying  a luxury vehicle that you couldn’t afford otherwise. 

2. Taking extravagant vacations. 

3. Buying prestigious luxury items that give the impression of showing off wealth.

 

 Here are some of the best things you can do with a monetary gift:

1. Pay off debts, especially student loans or credit cards.

2. Invest the money in an account that will grow your balance sheet.  That would include savings and retirement accounts (like Roth and Traditional IRAs).

3. Save the money in a college fund for your children or apply it towards school tuition.  If grandchildren are receiving financial gifts from family, set up a 529 plan and deposit all proceeds there.  Then let family members know about it.  Most of them would rather send a check to the college fund than buy them a toy anyway.

All of these recommendations also pertain to inheritances.

Always write a thank you note and explain how you’ve  used the funds.  It pleases the giver of the gift because you recognize and appreciate their values  and generosity. It will also likely increase the likelihood of more, and perhaps larger, gifts in the future. 

These are rules of thumb and each case is unique.  Each family dynamic is different. Sometimes the gift giver wants his beneficiary to take the family on a cruise or do something extravagant to enjoy the gift, and that’s wonderful.  The recommendations I have made show gratitude and respect for the giver and it puts the beneficiary of the gift in a better financial position, which is usually the motive for financial gifting in the first place.

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Filed under + Creative Ways to Spoil Your Grandchildren, Uncategorized

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