Commentary: Some gifts keep on giving to grandchildren

Daily Journal of Commerce (Portland, OR), Sep 19, 2007 by Linda Stern

Being able to spend money on your grandchildren is truly one of life's great pleasures, according to a new survey by the AARP.

"The stereotype of the doting grandparent is by and large true," said Nancy Smith of AARP Financial Inc., a for-profit investment firm that is a subsidiary of the nonprofit membership organization for people age 50 and over. It found that grandparents across all income levels typically spent 1.3 percent of their annual income on their grandkids, and that many folks would spend more if they had more.

Lower-earning grandparents spend about $150 a year per grandchild, while those with incomes of $75,000 or more typically spent about $333 annually per grandchild, said the AARP.

Fun as it is, it may not be easy money. Family complications - like ungrateful kids who never send thank-you notes or parents who don't agree with the way the gifts are spent - are just a part of it. Most of the gifting grannies expressed concern that their grandchildren didn't understand the value of a dollar.

There's also the possibility that the grandparents aren't aiming the money where it will be best used.

Toys are fun, Smith conceded, "but sometimes it's good to take some of those dollars and direct them to something they'll really need - like a college education or the down payment on a first house." Her company, which is pitching mutual funds to grandparents, has set up an entertaining Web site (aarpfinancial.com/ grandparents) that offers a quiz and tips for grandparents who want to make the most of their gifts.

Another proponent of helping the grandkids the right way is Fairfax, Va.-based financial adviser Bob Carlson, who publishes the Retirement Watch newsletter at retirementwatch.com.

He suggests strategies for grandparents who want to help their children's children save for college and buy their first homes.

Here's how to have some fun while helping the kids the smart way:

* Think now and later. Newborns need onesies and little kids love toys, and it's great to be the grandparent who steps in and supplies all. And everybody of every age loves a birthday card with money in it. But use a portion of what you can afford for these visible gifts, and keep some aside for a bigger gift down the road.

* Talk to the parents before setting up any accounts or handing over dramatic gifts. Saving money in your grandchild's name can affect the family's tax situation. They may have their own preferences for how money is saved. Don't use your money to force your kids to behave in any specific way relative to their children. The pleasure of grandparenting is in having the joy of children without the parental responsibilities, so don't start assuming those responsibilities.

* Feed the piggy bank when they are young. Young children should have three piggy banks: one for everyday spending and splurges, one for their longer-term goals (the Xbox or iPod), and one for charity. Pouring coins into each category when the kids are little gives them some instant gratification and might reinforce the differences between those three categories.

* Consider a 529 college savings account. It can be started with small amounts of money when a child is born. With regular monthly contributions, or even just nice checks on birthdays and holidays, you can build a significant amount of money. Put in $1,000 when baby is born, add $50 a month, and at an earnings rate of 8 percent, she can have $28,200 to spend on college when she's ready. If that grandchild gets a great scholarship - of course she will! - you can change the name of the beneficiary to another grandchild, niece or nephew.

* Start a family investment club. If your grandchildren are teens and have the interest in learning about investing, you can set up a family investment club, even if you have to do it online, and even if you have to seed the club's account with your own cash for a while. The grandkids can learn how to choose stocks or mutual funds by investing the club's money. Each "meeting" can include a simple lesson that different family members present.

* Help with that first house, if you can afford to.

"Helping with a home purchase is a gift that is not likely to be squandered. ... The home also is likely to appreciate at least with inflation, and that future appreciation is out of your estate," Carlson says. "Helping to buy a home also can free up some of the young person's income to fund retirement and the education of his or her own children."

Grandparents can do all sorts of things - from co-signing the mortgage to sharing home equity - to help with the home purchase. But he recommends the straightforward gift of cash to help with the down payment and with closing.

A married couple could give as much as $48,000 a year to a grandchild and his or her spouse without having to pay gift taxes or file a gift tax return. That's a lot more than the $150 found in the AARP survey. But it would be a truly "grand" gesture.

Linda Stern is a freelance writer. You can e-mail her at lindastern@aol.com.