Lori and Marek Fuchs have never fought in their 16 years of marriage—except over money. In this column, Mr. and Mrs. Fuchs, a real-life married couple with three kids (ages 12, 7 and 5), articulate their very different approaches to personal finance.
This round, he says setting aside money for the children's future requires planning now. She says, will the gifts go to waste?
(He also says it is her turn to make dinner…)
Mr. Fuchs: Hey, Honey, what’s for dinner? Also, would you rather save on taxes or raise entitled little twerps?
Mrs. Fuchs: I’m making dinner? I could have sworn it was your turn. And that’s quite a choice you set out. What in the world are you talking about?
Mr. Fuchs: Well, you hear a lot about gifting money to children.
Mrs. Fuchs: Oh, you mean gifting some of the hundreds and hundreds in personal assets we’ve accumulated?
Mr. Fuchs: Always with the wisecracks. Actually, yes, that’s what I’m talking about. From a financial standpoint, it can make sense, at least in certain circumstances. But this is one of those many issues (like life insurance or separate accounts) where the financial and psychological meet. And sometimes collide.
From a financial perspective, the decision on whether to gift is pretty straightforward: it totally depends. If you are rich and old, you should probably be gifting like there’s no tomorrow…because sometimes there is not. Your kids are going to get it anyway and why not save estate taxes? But as William Driscoll, who runs Driscoll Financial in Plymouth, Mass., frames it, most of those with young kids, should probably not—at least directly. “Generally speaking,” he says, “if a child intends to go to college and has a chance of getting financial aid, putting money in their name is a bad idea.” He does allow that if financial aid is out of reach, it may make sense.
Mrs. Fuchs: But I have the feeling that you think I’m going to say it is psychologically important to gift money to our children to make them feel loved, but I’m not so sure it is. I want our kids to feel that they need to be independent and self–reliant. I also don’t want them to blow money on a Firebird at 18 instead of going to college. Is there any way to raise self-reliant kids who won’t blow money and save on taxes?
Mr. Fuchs: A Firebird? Now, that’s love.
Mrs. Fuchs: Would you stay focused here?
Mr. Fuchs: Sorry. Well, we should gift, but to a 529 Plan. As Discoll says, all roads lead to these state-sponsored, tax-sheltered, gift plans. Money grows tax-free and comes out tax-free, as long as it’s used for college expenses, which obviously includes tuition, but even items like books or a computer. No pepperoni pizza, though. I would have blown all mine right there.
Mrs. Fuchs: Focus.
Mr. Fuchs: Beer too. Anyhow, 529s may ultimately have an impact on financial aid, but it’d be much less harmful to potential aid than a child holding money more directly. “Further,” Driscoll says, “it limits access to a large amount of money that an 18-year-old might prefer to spend on a new car or on being a ski bum.” Do you think our kids are more likely to blow money on cars or the slopes?
Mrs. Fuchs: I’m just ignoring you at this point, but I do know that we opened 529s for our kids. To be honest, though, I don’t really know what they are. I think I was snoozing when you explained why we needed them.
Mr. Fuchs: States pretty much have two types of 529 Plans. One essentially serves as prepayment plan for state colleges, locking in today’s prices, not a bad idea these days. But with your brains in their genes, all our children will probably be going to Harvard.
Mrs. Fuchs: I don’t really care where they go, I just don’t want them to be limited to the cheap schools because we didn’t plan ahead!
Mr. Fuchs: The 529 can also go toward any accredited school. Harvard is accredited, right? Anyhow, the 529 serves as a shell; the money put in it can be in stocks or bonds and is professionally managed. The main thing is that it sort of hits the tri-fecta of gifting concerns: it reduces our estate, it doesn’t add as markedly to the financial aid troubles brought about by more direct giving and, best of all, the kids have the money for education, but they can’t get their mitts on it for nefarious ends, like Firebirds. Also, psychologically, since it’s state sponsored and held at a bit of a remove specifically for education, it’s not like our little layabouts will grow up thinking they won’t have to work summers because they have a bundle of loot sitting in their local checking account, waiting to be wasted on God knows what.
Mrs. Fuchs: And taxes?
Mr. Fuchs: Well, you can’t deduct what you give from your federal taxes, but some states allow it. But the money you contribute or make is not taxed—and when it’s taken out to pay for education, it’s not taxed either. Plus, our parents and even our faithful readers can give into the plan. Hint, hint, dear reader, we have three little kids on the fast-track to Harvard. Hey, Honey?
Mrs. Fuchs: Yes?
Mr. Fuchs: Think we should we add a PayPal link to this article?
Other Great Mate Debates:
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