It’s fairly common these days for adult children to seek financial assistance from the Bank of Mom and Dad. Even more common is the number of parents willing to support their children: recent reports put that number between 75% and 80%.1,2 But as you help your children, are you hurting yourself? For parents, a wise approach is to examine how you can help while still being mindful of your own financial plan.
As a loving parent, it’s understandable that you would have the urge to come to the rescue. After all, in your child’s youth you probably scared away a hundred boogey-men, bandaged more skinned knees than you can count, and chauffeured thousands of miles to and from sporting events, recitals, or other activities.
But before you say “yes” to the son or daughter you could never say “no” to, talk to your financial advisor. There are numerous approaches for lending a financial hand, and some are wiser than others. It is incredibly important for you to understand the impact that coming to your child’s aid can have on your own financial future, and to carefully consider your options so that your loving and selfless gesture is both beneficial for your offspring and within your own means. If done properly, your generous offering of financial support should be woven into your overall financial planning.
Among the things you should consider:
- How strong is your own financial foothold? Can you afford to help without putting your own financial security and retirement plans in jeopardy? Is there a remote possibility that you could run out of money in your lifetime?
- What sacrifices will you need to make? Will your largess come at the cost of another week’s vacation? Prevent you from checking off another bucket-list item?
- What are the tax ramifications? Depending on the source of the funds you are using, there could be dramatically different tax consequences.
Next, think about your family:
- If you have multiple children, do you plan to support them all? Will you support them equally or according to need?
- Could a loan to one but not others create disharmony in the family? Will there be feelings of jealousy, ill will, or perhaps the notion that you’re playing favorites?
- Why do your adult children need help? Do they live beyond their means or, rather, is it due to a lost job or someone in the family becoming sick?
Now, some basic dos and don’ts. [NOTE: These are offered solely as suggestions and general advice and may not be applicable in every family situation.]
- DON’T: Let the total amount surprise you! You should have an understanding of the total amount of fiscal help needed before you provide any assistance.
- DO: Pay for something specific versus handing over cash or a check. Pay basic, necessary expenses such as the electric bill, six months or more of the mortgage, tuition for a semester of college, etc.
- DON’T: Throw good money after bad. If your child’s financial distress is of their own doing, due to a lavish lifestyle or continually poor decision making, you can probably expect them to return to the well for more; but let them know your assistance is only temporary.
- DO: Protect yourself and your child in case of divorce. Ensure that your child’s spouse does not benefit from a generous act originally intended to support them both.
- DO: Offer to set up 529 accounts for your grandchildren, allowing their parents to focus the money they have on taking care of their current needs or getting themselves back on their feet.
Finally, you need to be smart about protecting yourself. Depending on the amount of your gift, a more formal agreement, in writing, will remove all ambiguity — and emotion — from the details of the proceedings. If you are giving a loan, put yourself on their mortgage as a creditor so that you may have something to collect in a worse-case scenario along with other creditors.
Parental instincts are strong, but you should not put your future and all that you worked hard for at stake. Sure, there are many more happy endings than horror stories when it comes to parents providing their children with financial support, but you don’t want to end up in the latter group. A financial professional can help ensure that while you are helping your child, you can also be helping yourself.
1. Kline DB. Nearly 75% of parents help their adult children financially. USA Today website. https://www.usatoday.com/story/money/personalfinance/budget-and-spending/2017/12/11/nearly-75-of-parents-help-their-adult-children-financially/108507432/. Accessed June 5, 2018.
2. Ashford K. Supporting adult children could cost you $227K in retirement. Forbes website. https://www.forbes.com/sites/kateashford/2017/12/06/adult-children/#182ed42f4264. Accessed June 5, 2018.