An older relative gives annual gifts to minimize future estate taxes. She would like to give $19,000 to my daughter, who turns 18 this year. While we are incredibly grateful, we don’t think it’s healthy for very young adults to have access to large sums of money without working for it.

There are obvious concerns about being “spoiled” or squandering funds, but we’re also worried about the potential for addiction or exploitation. I’ve seen several young people get into trouble after inheriting larger sums.

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Besides, being broke and having to pinch pennies in college is a rite of passage, right? It builds character. We’ve worked hard for 18 years to instill a strong work ethic and teach budgeting skills, and I don’t want to see that undone.

That brings me to my question: How could this relative gift money to our daughter without giving her immediate and unsupervised access to it? College is already covered through scholarships and a 529 plan for which we are very grateful.

We plan to give her some money to spend and will also help fund a Roth IRA. It’s the rest — around $13,000 annually — that we need to figure out. I would prefer not to hire a lawyer and set up a trust, but I will consider that option if absolutely necessary.

The Parents

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Everyone’s rite of passage is different. No two are the same.

Your daughter is 17. When she turns 18, she will be of the age of majority, where she can, by law,  vote, open a bank account in her own name, and even buy a home in most states. She will be legally old enough to make her own decisions, financial and otherwise.

In reality, she may still be under your charge. That is, living in your home and abiding by your rules, and going to college with your financial help. If she wishes to continue to receive your financial support, it makes sense that she should abide by your rules.

In the long term, however, I don’t see why your own views on an elderly relative deciding to give (or not) a $19,000 gift to your daughter should be your decision to make. This could go a significant way in helping her to rent an apartment and even save for a down payment.

It could be a springboard for her first investment in the stock market, put compound interest on her radar and give her a taste of what it’s like to watch your investments grow, and have that peace of mind that she will likely have a more comfortable retirement.

This could actually do the opposite of what you fear the most: It could instill in her a financial responsibility and maturity that encourages good habits: putting money aside every month for an emergency fund and retirement savings, and finding a company with a 410(k) match.

Or it might spur her to think about setting up her own company, and becoming a business owner. Who knows what path she will choose? The more freedom and options she has, the more exciting her future will become. That $19,000 could propel her rather than hold her back.

However, it’s understandable to want to protect her from potential risks such as addiction, exploitation or poor financial decisions — especially if there is a history of this in your family or, more critically, if your daughter has had trouble in the past.

To be eligible for a Roth IRA, she must have earned income. Contributions are limited to the lesser of her earned income or the annual contribution limit ($7,000 as she’s under 50). You can gift her the money for the contribution under those rules. Eligibility to contribute phases out at higher income levels—roughly $150,000 to $165,000 for single filers.

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There are ways to balance giving her the gift while maintaining oversight: A “family-managed investment account” where the money is invested under your supervision, with access to funds limited until certain goals or milestones are met.

Your elderly relative could also set up a trust for your daughter and deposit money into it, with instructions that she won’t receive full access until a specific age, say 25. The person who creates the trust (the relative/grantor) determines the rules.

The trustee — the relative or you and your husband — could manage the money. The terms could allow limited access before 25 for things like education, emergencies or housing, and could also provide for gradual distributions rather than a lump sum.

A revocable living trust is flexible but is typically used for a person’s own assets during their lifetime. An irrevocable trust, on the other hand, is more often used for gifting and estate-planning purposes and generally cannot be changed once established.

Other options, which don’t typically require the help of an attorney, include custodial accounts — like Uniform Transfer to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA) — but the recipient usually takes full control at 18.

Any money you deposit in such an account is an irrevocable gift, much like putting stocks in an irrevocable trust, meaning you cannot take it back and that the funds have been removed from your estate, and they do not get a step-up in basis.

Irrevocable trusts can contain spendthrift protections; UTMA assets cannot. The courts have ruled that 529 plans, which people use to save for their children’s or grandchildren’s education, should be treated as gifts for tax purposes, even though they’re in a parent’s name.

You and your elderly relative want what’s best for your daughter: motivation here is key. There will come a time when your daughter will be very glad of $19,000. It’s not enough to change her life, per se, but it’s enough to help her along her way.

You are all trying to do the right thing.

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