How to Leave Money to a Young Adult

A radio program, “The Bert Show,” is getting some attention about a caller last week that illustrates the dangers of leaving money to young adults. The caller, a college senior named Kim, received $90,000 from her grandparents to use for college. Unfortunately, she went through it too quickly, and she’s out of money with her senior year to go. You can hear the full audio here, if you’re interested.

There was a bit of a media pile-on of this young woman–if you want that, you can find it here (with GIFs!) or here (with auto-playing video, sorry). Some of the pile-on isn’t really fair; the Fox News article I linked to, for instance, says she “blew through a $90,000 college fund on expensive clothes and a trip to Europe.” She did spend money on clothes and a trip to Europe, but she also managed to pay for 3 years of college, so it wasn’t as if she completely wasted the money. Still, even she admits she should have done better.

My purpose isn’t to pick on or defend Kim, but to see if her situation can teach us something. A major part of estate planning, after all, is leaving gifts for beneficiaries. How could we do this more effectively?

Don’t give the money outright

Kim didn’t invent burning through a windfall too fast: stories like “What blowing a $250k inheritance taught me” and “I Spent My $66,000 Inheritance on Basically Nothing” are other cautionary tales. Windfalls are tough to manage for almost anyone; there are also stories of athletes who wind up broke and lottery winners who wind up going through their money.

One option is to leave the funds in trust for the beneficiary. There’s going to be some expense involved in establishing the trust, but you can delay outright distributions until beneficiaries reach a certain age (often 25 or 30, but you could go later than that) or you can restrict the flow of the money. In this case, those age limitations wouldn’t make sense, but instead perhaps a trust in this case could have been structured to pay only for specific college-related or other approved expenses (or it could have been gifted to a 529 plan, which would do something similar).

Don’t give all the money at once

At one point in her radio appearances, Kim complained that no one taught her how to budget the money. The hosts laughed that off as an excuse (and they’re not entirely wrong about that), but planning for 4 years of expenditures is pretty hard when you are a novice to budgeting and personal finance.

What if instead the money were given out a year–or maybe even a semester–at a time? If she overspent one semester, that’d be a lot easier to fix than the situation she’s in now. Also, she would have seen whether or not her expenditures were reasonable, or if she was going to have to cut spending or increase her income.

Another possible benefit of giving the money more slowly is avoiding gift tax problems. Each year, a person can give up to $14,000 (for 2015, this number is indexed for inflation, and may change later on) to someone else each year before triggering the gift tax. Giving the money in smaller chunks may help prevent gift tax problems.

Consider paying the expenses directly

When you give cash, the money can be spent on anything. Kim spent some of the money in a way her grandparents hadn’t intended, obviously. Rather than take the risk of the funds being spent incorrectly, her grandparents could have simply paid the tuition bills directly. They might have still had to send money for books and other school expenses, but they know those tuition bills are being paid.

If you’re in a position to give this kind of gift, the last thing you want is for that gift to go to waste. This particular story is not the tragedy it could have been; she’s only got to come up with the money for 1 year of school, and she’s probably going to get a quick education in personal finance and the world of work (I was surprised when she said she was 21 and had never held a job!). Also, although I’m suggesting ways to improve on an outright gift, I certainly can’t fault the grandparents here–they did a tremendous service to their granddaughter, and I don’t want to minimize that.

Windfalls are hard to manage, and it can be even harder for an inexperienced young adult. If you’re looking at making a gift or leaving money to a young adult, consider how to structure that gift to make it more effective.

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