Children Getting Too Much Money, Too Soon

By: Don McNay
By: Don McNay

I see people make the same mistakes over and over, particularly when handling money for children. A number of children inherit money or receive money from an injury or other legal settlement.

"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, particularly when handling money for children. 

A number of children inherit money or receive money from an injury or other legal settlement.

There are situations when  children wind up with a larger net worth than their parents.  

The imbalance of wealth can cause family pressures. I've seen children use their wealth to belittle their poorer parents.

I've seen many  parents succumb to temptation and use their children's money for themselves. 

In some cases, I have seen parents steal every dime of their children's money.

If no one catches the parents during the childhood, An option at adulthood is  for the children to sue and prosecute their parents.  

Not a great way to promote family unity. Many states have guardianship laws to protect a child's money.

These laws work when they are followed and enforced. 

A major flaw within most state guardianship laws is that children are allowed 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.

However, it is assumed that someone who can't legally buy a beer can be responsible for handling thousands, and sometimes millions, of dollars. 

There are simple financial planning techniques, like structured settlements and trusts,  to prevent a child from getting all the money at age 18. I urge parents and guardians to use the techniques, but many do not.   

I have seen hundreds of cases where guardians turn money over on a child's 18th birthday. It is like watching a train wreck 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 kid in the neighborhood until the money runs out.   

18-year-olds with cash are good clients for people who peddle booze and drugs.   There are 18-year-olds who handle money well but they are few are far between. 

I once met with a parent who could not be convinced to defer their child's lump sum over a series of years.  Instead, 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 during an armed robbery. 

One man is dead, and another is serving a life sentence in prison because an 18-year-old got too much money at once.  Many young people who blow their money look back and wish they had a  second chance to do it right.  

A person's financial profile is set at age 27.  If someone is a spender before age 27, they can still possibly turn it around. If they are a spender after age 27, they will probably   be that way the rest of their lives.  27 may not be the magic age of financial fate, but it is a time when many people are starting their careers and starting a family. The decisions that an individual makes at 27 will, for the most part, be more mature than those they made at 18. The best idea is to ensure that children's money is kept safe until they are old enough to make good decisions and manage it wisely.

Don McNay, CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping people deal with "Big Money" issues.

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