In the July, 2013 issue of Wealth Management, there was an article giving some ideas on helping your child or grandchild with money issues. The more obvious one was to “start them young”. Give the child a piggy bank. Once a year, count the money saved and pay her a percentage of the total accumulated amount. This enforces and teaches the concept of interest, plus it will give the child an incentive to save, knowing that there is a “bonus” coming. If you have a teenager that works, you can open a Roth IRA for the child and share a contribution to the Roth with your child. Your contribution will be a gift to the child, so he can do whatever he wants with the money. However, if he is responsible enough to work and earn an income, he will probably understand the concept of putting money away for the long term. Showing him a chart of the power of compounding may also provide encouragement. Another idea is to have your child borrow money for college himself, with the understanding that if the college experience leads to a degree, you will participate in helping to repay the loan. No degree, no help. This may encourage more study leading to less time in school and less debt. Finally, if you have a young adult that is un-employed or under employed struggling with college loans, credit card debt, etc., you could consider paying off the debt the child has incurred and issuing a new loan to the child for the amount paid. The child will pay less interest, and the parent will probably earn more than a bank savings account would pay. You should let your attorney and tax accountant review the transaction prior to implementation.

On a similar note, in the September 15-16, 2013 edition of the Wall Street Journal, there was an article on giving smartly to grandchildren. In 2010, household headed by people ages 55 or older spent $9.7 billion on infant food, equipment and clothing, along with toys, games and tricycles. They also spent $2.4 billion on elementary and secondary school tuition. All this generosity is admirable, but be careful that you don’t impair your own financial security while helping children and grandchildren. Consider starting with smaller gifts and seeing how your budget responds. Another approach would be to make loans in lieu of gifts. It will be important to set guidelines for these loans with one important provision: if you borrow from me and don’t pay me back, there will be no more loans. The spigot is closed. Designating grandchildren as beneficiaries of an IRA is another idea. This move does not impair your standard of living and provides the grandchildren an unexpected “windfall” at your death. Discuss this strategy with your tax advisor. Also, it may be advantageous to convert an IRA to a Roth IRA, which results in tax free income for your grandchildren. Whatever approach that you take, be aware of conflicts that could arise if one grandchild gets more than another. Because it is the Christmas season, I am going to include the following at the request of my compliance department without reminding them that my readers are fairly intelligent and would consult with tax advisors before major changes: “This material is intended for informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment advice. If converting to a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and all earnings. A conversion may place you in a higher tax bracket. Because Roth IRA conversions may not be appropriate for all investors, it is suggested that you discuss tax issues with a qualified tax advisor.”

As you look for guidance on these issues, there is a prayer in the Episcopal Book of Common Prayer that should help: “Heavenly Father, in you we live and move and have our being. We humbly pray so to guide and govern us by your Holy Spirit, that in all the cares and occupations of our life we may not forget you, but may remember that we are ever walking in your sight, through Jesus Christ, our Lord.” Also, from Psalm 37, “Trust in the Lord and do good, so you will live in the land and enjoy security.”

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