(Corrects name to Totenberg from Tottenberg in the 8th
paragraph and subsequent references)
By Beth Pinsker
NEW YORK May 14 When her son recently turned
18, Lisa Kirchenbauer and her husband had him sign papers to
take control of an account for minors they had long ago set up
as a college fund - which had grown to about $60,000.
"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
"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 Totenberg, 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 Totenberg.
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.
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
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
Totenberg, 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,"
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 here.
Editing by Lauren Young and Dan Grebler)