Monday, April 24, 2006

The Bank of Mom and Dad is the Right Way to Transfer Wealth

The New York Times has a popular story now about parents continuing to subsidize their twenty-something and even thirty-something children. They cite a University of Michigan study by Bob Schoeni that found that 25 and 26 year olds get from their parents an average annual gift of $2,300. This is often in the form of payment for particular things, like cell phone bills, or childcare, or insurance, rather than a general cash subsidy.

Some lament this trend as exacerbating young peoples' "failure to launch." I think it is a good thing. Economists have been wondering for years how the Baby Boom's massive accumulation of wealth will get transferred to the next generation – or taxed, or just spent. Investing in your children so that they can begin adult life seems to me an excellent, nuanced way for this transfer to begin. People are at their most thoughtful in investing in, and for, their own families. I would trust parents to calibrate their support correctly much more than I would count on the government or the market to do so.

I now sit in a house made possible with a down payment loan from my parents, to whom we are all daily grateful. I have already begun to calculate how we can save for the junior Gruntleds once their massive tuition payments end. I see down payments on my hypothetical grandchildren's childhood homes in the dim distance. And that is a good next thing to save for.


ken mcintyre said...

I have always preferred doing business with the Bank of Mom and Dad. They offer better interest rates, more flexible payment schedules, and the kind of personal service you just don't get anywhere else.

By the way, I hope I don't jinx it, but the Bank of Mother- and Father-in-law are helping us finally finish our search for a house with some land outside of Danville. We will be up there today signing part of our life away.

Gruntled said...

Hurrah! Go Family Cash Values!