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, Va., 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 inheritances.
“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% 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% of recipients put money into savings, 10% used it for travel and entertainment, and 5% 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.
Roll Over 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% of assets.
Allow a Little Splurge
For Tim Noonan, managing director of capital market insights for Russell Investments in Seattle, 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 lined up.
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,” she says.
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.