The Richmond Register

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September 17, 2013

Don’t give your child big money before 27

RICHMOND — “And here I sit so patiently

Waiting to find out what price

You have to pay to get out of

Going through all these things twice”

Bob Dylan

I see people make the same mistakes over and over. This is particularly true when watching people handle money for children.

A number of children inherit money or receive money from an injury or other type of settlement. These children will often have a larger net worth than their parents. 

This imbalance of wealth can cause family pressures. I’ve seen children try to use their wealth to belittle their poorer parents. I’ve seen parents succumb to temptation and use the child’s money for themselves. In some cases, I have seen parents steal all of a child’s money. If the parents have any money left, the child’s options are to prosecute or sue their parents to get the money back.

Not a great way to promote family unity.

Most states, including Kentucky, have guardianship laws set up to protect a child’s money. These laws work when they are followed and enforced.

A flaw in many guardianship laws is that most allow children to take control of the money on their 18th birthday and spend it as they wish.

Few 18-year-olds are prepared to handle a large lump-sum of money. Laws prevent people from buying alcohol until age 21. It is assumed that people who can’t legally buy a beer can somehow be responsible for handling thousands and sometimes millions of dollars.

There are some financial planning techniques to keep a child from getting all the money at age 18. Putting the money in an annuity or trust are simple ones. I urge parents and guardians to use these tools. Some do, but many do not. 

I have seen case after case where guardians turn all the money over to the child on the 18th birthday. I hate it. It is like watching a train wreck over and over again and not being able to stop it.

Many 18-year-olds feel pressured to spend money on their friends. The child with the lump sum will be the most popular in the neighborhood until the money runs out. 

They are good marks for car dealers, people who sell liquor and drug dealers. If you want your child to die from a heroin overdose, give them a big wad of money and no guidance on what to do with it.

I know there are some 18-year-olds who handle money well, but for over 31 years, I have watched many run through their money in no time.  

One of the worst cases I’ve ever been involved in was when I could not convince a parent to do anything. The money was put in a bank account and $100,000 was given to the young man on his 18th birthday. He used the money to develop a cocaine habit and when that money ran out, he shot a man while trying to rob a pool hall. One man is dead and another in prison the rest of his life because an 18-year-old got too much money at once.

I blame the parents and guardians for putting the 18-year-old in a disastrous position. Many young people who blow their money look back later and wish they had a second chance to do it right.

I read that a person’s financial profile is set at age 27. If someone is a spender before age 27, they might turn it around later. If they are a spender after age 27, they will be that way the rest of their lives.

Twenty-seven may not be the magic age of financial fate, but that is a time when many people are starting their careers and starting a family. They will make more mature decisions than they would at age 18.

The best idea is to give children a chance to have some money available when they are older and can make better decisions.

Don McNay, CLU, ChFC, MSFS, CSSC is Chairman of the McNay Settlement Group and founder of Kentucky Guardianship Administrators. He was recently elected to the Board of Directors for the Society of Settlement Planners and was a past Board member for the National Structured Settlement Trade Association.

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