We sit down with Dennis Prout of Traverse City’s Prout Financial Design to find out how to pass along funds—and financial wisdom—to the next generation.
How many grandkids do you have?
What do they call you?
Are the rumors true? Is grandparenting really better than parenting?
It’s categorically insane because we don’t have the responsibility of parenting and this gives both of us more freedom to express ourselves. Also, we don’t have to discipline them which frees up the relationship.
What did you teach your own children about money?
Not nearly enough. I tried to teach them the importance of earning a dollar and saving. When they got older it was about mutual funds and saving for their own educational uses. Lindsay, my daughter, called it the “Washington thing” referring to the name of a mutual fund (ha!). Again, we tried. Now, we have more influence because they are in their working years and our advice means more.
What has changed in the financial industry since you started saving for your own kids?
It used to be about the educational IRA and UGMA (Uniform Gift to Minors Act) accounts but now it’s about the 529 Plans and the Roth IRA. The Roth IRA has been a huge boon for saving for grandkids because it’s not counted against them in the FASFA. Even the 529 Plan has loosened up to be more inclusive of different learning opportunities (not just college).
Are there new strategies parents and grandparents should think about?
Several, but here are a few …
- You can convert your IRA to a Roth IRA (which grows tax free) so that they can use it for college funding. You will be able to draw money out in 18 years to help that grandchild. At the same time, you can put limitations on that through a trust such as, “They must maintain a B average to receive funds.”
- If a child has earned income, you can set up a Roth IRA in their name.
- Within certain limitations, a grandparent could liquidate a savings bond, use the proceeds for higher education and not pay any tax on the gain.
Is it wise to leave a grandchild as a beneficiary?
My first question would be, “How old are they?” and second, “Are they good with money?” It also depends on what kind of account. You must determine if they have full access or if the court will have to oversee transactions. If the account is sizeable then you’ll want to consider a trust to control the disbursement. Consider that most beneficiary IRA’s are spent in a year. Think in terms of family relationships and how to foster family unity. Relationships are more important than money and I think we’ve all witnessed that.
Besides money, what values do you plan to pass on to your grandkids?
I want them to understand the importance of faith and how to gift money. For example, we have already chosen nonprofits as contingent beneficiaries after we pass away. We are leading by example.
The biggest thing any grandparent can do is to nurture their grandchild with love and acceptance. The dream for me is to encourage them in their talents. Also, giving to their parents both emotionally and financially, that’s important to us.
Dennis Prout is a Certified Financial Planner® and Master Elite Advisor with Ed Slott’s IRA Advisor Group. He has been leading the retirement planning conversation for over 25 years in Northern Michigan. He is also the host of NEW Retirement Radio on NewsTalk 580 am.
Investment Advisory Services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. Capital Asset Advisory Services, LLC, does not offer tax or legal advice.