Are Your Parents Doing You a Disservice By Giving You Large Gifts?

Did your parents help you out with your kid’s education expenses? Did they supply money for a down payment on your first house? Do you get an annual gift of cash?

It’s Mom’s Fault!
If so, it is possible your parents weakened your ability to produce and accumulate wealth.

As part of the now famous research done by Thomas Stanley and William Danko – who wrote the Millionaire Next Door  books, adult gift receivers and non-receivers from 10 different occupations all of whom were between their early forties to mid-fifties in age were surveyed to find their household net worth, their annual household income, credit usage and investing habits.

What Did They Find?
Gift receivers in 8 of 10 occupations produced less income and had accumulated less net worth than their non receiving counterparts.

Why?
Here are their conclusions from the survey.

Giving causes more consumption than saving and investing.
For example, if Grandma and Grandpa paid for Junior’s tuition to a private school where the other kids all came from wealthy families, Mom and Dad have to spend more to keep their kids up with the others (clothing, sports equipment, travel, extra activities, parties and etc).

The receivers still think their parent’s wealth belongs to the whole family.
They haven’t learned yet that what Mom and Dad have is theirs to distribute. Mom and Dad aren’t required to give to the kids or leave an inheritance.

The receivers use credit to anticipate future gifts from parents.
They know they will be getting a gift at the end of the year so they go ahead and take that summer vacation now and just put it on the credit card, since they will be able to pay it off when the gift comes through.

The receivers invest less than the non-receivers.
They spend more on themselves, use credit more and give more away than the non-receivers so they have less to invest.

Is Weakened Ability Inevitable If You Receive Gifts?
Of course not all adult children of the wealthy who get gifts become dependent on them. Children who learn to live beneath their means, be independent and responsible are likely to benefit from the gifting.

What’s a Wealthy Parent To Do?
Not all wealthy parents give gifts to their adult children.

But if you are one who would like to take advantage of avoiding estate taxes through lifetime giving, how can you avoid the negative impact of creating a potential ‘economic outpatient’ situation?

• Give education. Of those wealthy parents that gift to their children, paying for education is most prevalent, and considered by these authors to be advantageous rather than detrimental (notwithstanding the private school effect mentioned above).
• Reward the right things.  Don’t reward lack of initiative, spendthrift behavior or irresponsibility by helping the child who exhibits these traits.
• Allow freedom to meet and beat challenges.  Don’t bail your child (especially your adult child) out of situations they have created. Teach them as youngsters that they have the resourcefulness and responsibility of handling the consequences of their actions.

If you are fortunate enough to have wealthy and generous parents who want to help you (or your kids) by gifting, how can you handle the situation so that you avoid harm? Should you tell the folks not to give you things? Should you hide the gifts from your kids? How do you avoid becoming dependent on your parent’s gifts?

My thoughts are to:

• Never count on any gift (or inheritance) coming in the future
• Find a way to help your folks understand the consequences of giving – if for instance – they want you to send your kid to a private school, show them all of the monetary obligations and expectations you will have that you don’t have now and gently suggest that they use the money another way
• Save or invest gifts you do get – it is found money
• Be grateful
• Remember how hard your folks worked to get their money and don’t expect to start out with their standard of living.