Grandkids asking for money? Not so fast. Ask yourself these questions first

Don’t fall off your rocker if your grandkids ask you for money this holiday season and beyond. Here are some things to consider before hitting the ATM.

“Parents” magazine covered a survey conducted by The Senior List this past October that revealed it’s getting very pricey to be a grandparent. An incredible 96 per cent of grandparents contribute financially to their grandchildren.

According to the survey, 63 per cent of grandparents make monetary sacrifices for their grandkids’ happiness (of course, this is natural), and 26 per cent live more conservatively so they can help support their grandchildren. From buying toys and clothing to funding extracurricular activities or even contributing to college savings, grandparents frequently step in to help. Holidays, birthdays and vacations also add up, as grandparents strive to make these moments unforgettable. Let’s not forget that many grandparents today are providing free child care for working parents, saving families thousands of dollars annually in care costs but potentially impacting their own retirement savings or plans by exiting the workforce earlier than planned.

What shocked me in the findings was that the average amount spent on grandchildren is hovering around $4,000 annually. About 10 per cent of respondents admitted going into debt and delaying retirement to help their grandchildren. When the grandchildren are a bit older, the requests and needs get bigger and include things like tuition fees, down payments and sizable wedding gifts.

Here’s a simple framework to work through if you’re asked for money by your grandkids (or their parents).

Can you afford to give money to begin with?

Whether the requests are for big or small amounts, consider your personal financial constraints first. The ideal scenario when giving money to grandkids is to ensure your own retirement savings and income are sufficient to cover current and future expenses (especially if you’re making a multi-year commitment — or at least if that’s what they’ll expect from you). Giving too much too soon could jeopardize your financial security. Do you have a safety net for unexpected expenses like out-of-pocket health care or home repairs? A financial planner can work this out with you and help you to determine if you’re in a position to give at all. If it turns out that your capacity to give is low (or not at all), helping your kids and grandkids understand that can prevent awkwardness down the road.

What’s it for, and are you OK with that?

Would your money have life-changing impacts? As an example, an annual RESP contribution, especially if the parents can’t afford to save anything toward their child’s future education costs, could make the difference between a child going to post-secondary school or not. An added perk is that, under the Canada Education Savings Grant, the government matches 20 per cent on the first $2,500 contributed annually to an RESP, to a maximum of $500 per beneficiary per year. The lifetime maximum per beneficiary is $7,200, up to age 18. The same consideration goes for down-payment contributions, buying a grandchild some stocks or bonds, or helping the parent(s) make ends meet so they can afford the basics like rent and groceries.

Sometimes the money being requested might be for something much less impactful, such as to shop for sneakers or take a trip. Certainly this would bring joy to the grandkids, but it’s not an investment. Is joy alone worth it for you?

Could the gift be an opportunity to teach financial literacy?

Maybe this is the perfect moment to help your grandchild learn life skills around money management like saving, budgeting and investing. Budgeting is possibly the most critical skill kids need to learn. Here are three simple budget lessons they’ll have for life:

• Before spending any of it, put some in a savings account (I recommend at least 50 per cent — it’s not like they have any expenses!)

• Spend only what they have left (this is the concept of spending within your means).

• When they spend, get a deal on something that’s really worth it to them (stretching your hard-earned money to achieve the greatest value is one of the most important personal finance principles).

This may open the door for them to take charge of their own banking (within reason, and age appropriate) and could spark an interest in making their own money with a part-time job when ready.

Don’t compromise your retirement

Unlike taxable gifts, which include real estate that’s increased in value and farms, investments that generate revenue, RRSPs and non-registered investments, cash has no gift tax in Canada. That’s why many grandparents choose to “gift” money to their heirs in the present rather than leaving it in a will. Not only could it potentially shrink the tax liability an estate could face, it’s also joyful to see that money put to great use by younger family members who could use a helping hand. Gifting sizable money, like early inheritance, requires proper financial planning. The tax rules around gifting assets are complicated, so make sure you talk to an experienced estate planner so that there are no surprises.

There are other considerations, some of which could impact family dynamics, and personal judgment is required. As examples, does giving money to one grandchild show favouritism among siblings or cousins? Could an unhealthy reliance on you for money result, possibly creating the expectation of ongoing financial support? Could the parents take issue with the gift, or even take the gift for themselves? There’s much to consider before gifting money, so do your due diligence.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.