How much should you give to your children?

Giving money to future generations can be a surprisingly thorny problem. Too much, and there is a risk that children may find it difficult to chart their own paths. Too little, and they may end up saddled with debts from education or housing that limit their options. It is a dilemma for parents who want their children to have freedom of choice but retain a sense of ambition.

The first question is whether you should give your children money at all. Some parents fear that giving children a helping hand may rob them of motivation and a sense of purpose.

The concept of so-called ‘affluenza’, the lack of drive often associated with comfortable lifestyles, has gained currency in recent years. It has even been used as part of the criminal defence strategy for a US teen convicted of killing four people in a drunk-driving accident, arguing that he was too rich and spoiled to understand the consequences of his actions.

Absence of drive and ambition

Concerns about ambition are not new. Parents have long recognised the problem. A 2014 survey of 3,000 families around the world by law firm Withers and research consultancy Scorpio Partnership found that the second greatest worry among the wealthiest families was that their children would lack the drive and ambition to get ahead in the world. Examples abound of children of the world’s super-rich who, in the absence of a clear purpose, have struggled to find positive outlets for their energy.

This argues against large and unstructured gifts to children, particularly at a relatively young age. However, there is no doubt that today’s younger generations have a more difficult path than their parents. Their education is more costly; the labour market is more competitive; salaries have not kept up with the cost of living; housing in many countries is increasingly expensive; and taxes are rising to pay for an increasing demographic proportion of retirees. Family support can be vitally important in helping children achieve important milestones in their lives.

For example, parents can pay for education costs, for a deposit on a home purchase, or premiums for health or life insurance. Providing support for higher education costs can enable children to start their professional lives with a clean slate, free from student debt, which may enable them to build up their savings. Parents could earmark capital for a deposit on a home, which would save their children paying rent and provides security. These “small” helping hands can make a huge difference when starting out in working life.

Long-term savings

An alternative approach is to contribute to children’s long-term savings. One of the most effective methods is to pay into a pension scheme. Not only does it give the maximum possible time for the capital to grow, it can make a great difference in terms of financial resources later in life, and is safe from being spent. A relatively small commitment from parents or grandparents can make a huge difference: €500 a month, invested for 18 years and earning an average of 5% per year, would grow to €174,600.

Using a pension structure is one way of putting parameters around any saving schemes for children. Another option is trusts, which can place limits on the age at which a child can inherit money, or on uses of the capital. For example, the trust terms could specify that the money is only to be used for education, or to buy a home. It can also be used to hold back capital under certain circumstances, and to circumvent the influence of third parties, or protect an individual’s inheritance when they get married.

Tax considerations

If you have decided to give money to the next generation, whether in the form of a lump sum or as structured savings, other considerations come into play, of which tax will be one of the most important. That will depend on whether you decide to give capital to your children while you are still alive, or as part of an inheritance.

Gifts to family members need to be managed carefully. There are complexities around compulsory inheritance rules in Luxembourg, France and some other European countries. The grand duchy’s strict réserve héréditaire system means you cannot disinherit your children. For example, grandparents can bestow gifts on their grandchildren from the discretionary portion of their estate, but need to comply with the reserved portion rule – the proportion of their estate of which children cannot be deprived.

The potential tax liability is complicated and varies according to whether the gift is included in the estate, or ‘unrecoverable’, whether the recipients are linear descendants or not, and whether the gift is from the discretionary or reserved portion of an estate. It is worth noting that for gift tax purposes, the domicile of the recipient and the donor are irrelevant.

If you want gifts to be made after your death, you should outline this in your will, again taking tax into consideration and deciding whether you want to put capital into trust or to be given directly, taking account of the compulsory inheritance rules. Children are entitled to a specific minimum portion of the estate – 50% for one child, 66.6% for two, and 75% for three or more, which overrides any will you might make. The rest of the estate can be distributed freely. Again, the residence of the heirs has no impact on inheritance tax due in Luxembourg.

How much you can afford?

Affordability is another factor for parents and grandparents. You may have more money than you need today, but have you accounted for potential care costs as you grow older? People often underestimate the amount of money they need to be comfortable in retirement, or fail to factor in inflation. In your enthusiasm to support future generations, it is important not to compromise your own standard of living.

You should also consider the type of assets you give away. Do you hand over stock market investments, for example, in the hope that it will help future generations understand how investment works, or do you give cash? You may even want to earmark certain heirlooms – pictures, ornaments, pieces of furniture – for particular recipients whom you think might value them most.

There is no magic number on how much you should give your children. The right amount lies somewhere between being enough to give them choices, but not enough to erode their ambition, and that figure is likely to be different for everyone. The key is to think carefully about how, when, and what you give—and to set clear parameters that reflect your family’s values and needs. There are financial discussions that are important to have as a family!

Some parents fear that giving children a helping hand may rob them of motivation, ambition and a sense of purpose.