What kind of legacy will help your grandchildren become financially secure adults? We sought input from seven financial experts, including certified financial planners, financial analysts, and public accountants. Although specific recommendations varied, the bottom line was crystal clear: Invest wisely, and make sure the giving is about more than money.
The Gift of Education.
The first, and arguably best, preparation for future riches is education. Data has long shown that college graduates earn more than high school graduates, so helping to ensure post-secondary studies is a gift that lasts a lifetime.
Creating a college savings account, a.k.a. a 529 Plan, is an easy and tax-wise way to go. Funds allocated to these accounts are earmarked for educational expenses on behalf of a child or grandchild. (If the intended recipient decides not to pursue learning, the beneficiary can be switched to another family member.) These assets grow until withdrawn, are not reported on the Free Application for Federal Student Aid, confer tax benefits on account holders, and are tax-free for recipients.
How is the money in a 529 Plan invested? That depends on the plans offered in your state and the choices you make -- either to invest in select mutual or money-market funds or to prepay tuition. Do your homework before proceeding.
The Gift of Liquid Assets.
Another, but by no means mutually exclusive, approach is to set up a brokerage account in your name, and maybe add the child as a shared account holder. This is an excellent way to invest for future generations. Paul Tucci, who wrote The Handy Investing Answer Book and The Handy Personal Finance Answer Book, suggests investing in a low-fee index fund that can be augmented at set intervals, such as birthdays or holidays. Nancy Butler, a certified financial planner in Waterford, Conn., chose a slightly different path. She wanted to provide for her grandchildren's education and also ensure their well-being if tragedy befell their parents. Her investment vehicle of choice: a variable universal life insurance policy, which has a flexible premium, pays a death benefit, and grows in value from investment returns (it can also shrink).
In general, experts caution against buying shares of only one stock because doing so violates the accepted wisdom about holding a diversified portfolio. An exception may arise if you buy a couple of shares in a company that the child knows about, such as Disney, and then use the holdings as a teachable moment about investments, says Tom Scanlon, a CPA and certified financial planner in Manchester, Conn.
Experts also favor retaining control of the assets, at least for a while, even after the child turns 18. As Shane Leonard, a certified financial analyst based in London, points out, young adults may lack the discipline to use the money wisely. So if you haven't already taught a grandchild the value of money, how to earn and save it, and how to put off impulsive purchases, there's no time to waste. Ditto for understanding how financial markets work.
The Gift of Values.
Of course, financial resources aren't the only basis for a rich life. Experts stress the importance of modeling the right attitude about, and perspective on, money. They also suggest bringing books into the home and reading to the child; rewarding good behavior and correcting bad behavior; and never spoiling a child with anything but love. Carol Phillips, a health coach in Bedford, N.H., asserts that physical activity is part and parcel of a complete and rich life and advises that adults and children spend time together engaged in physical activities."The gift of health has, by far, the best return on investment," she declares.