Estate Planning Blog

Avoid Becoming the Bank of Mom and Dad

Many parents find themselves faced with the decision of whether or not to help their children financially. We spend our whole lives raising them and then they come back asking us for money… It’s a difficult dilemma. Parents are torn between wanting to support our kids but also knowing that if we give too many handouts now, what will happen when the child is 30 or 40 years old? So how much should you be willing to support your children?

As more baby boomers retire and their adult children are out of work, many parents find themselves financially strapped. It’s a parent’s instinct to want to help your child if they’re struggling financially, but it could put you at risk for retirement savings depletion or cutting back on the contributions you make towards planning for your future needs – especially with legislation like Social Security changes looming over us all. If you decide that providing monetary support is something worth doing because of how important family ties can be through tough times, here are some guidelines to follow so you don’t jeopardize your own personal long-term financial safety and security:

1. Loan Or Gift – To Declare or Not?

One of the most confusing decisions for parents is whether to give a child money as a gift or loan. It can be difficult, especially when you want them to repay it but they don’t. Under IRS guidelines, gifting up to $15k per year (for 2020) will not require filing a gift-tax return. But if given in installments that total more than $15k, this may need to be declared on your taxes each year you exceed the gift tax limitations. Work with your children before giving any gifts so they understand what budgeting or behaviors they need to alter. Try to lessen their inclination towards spending frivolously because there is ‘extra’ money available from family. Sometimes these circumstances happen unintentionally at times even though we know better.

2. Focus On The Essentials.

When you see your children struggling to afford necessities, it can be hard not to want to help them. Focus on the essentials and only offer assistance with critical bills so that coverage isn’t lost in between jobs or a medical emergency strikes. If they’re living independently, remind them of what constitutes an emergency before offering any financial help – this will help avoid future arguments when their definition of an emergency differs from yours.

3. Formalize The Loan Process.

It is in everyone’s interest to formalize the specifics of a loan, particularly for large dollar amounts. It may be awkward the first time when your child waves away a loan agreement as unnecessary. But leaving the loan agreement as verbal and open-ended will reduce the likelihood that you’ll get repaid. This may create challenges down the road and possibly hard feelings, so write all details about loans including purpose, amount, and repayment schedule on paper – don’t forget both parties should sign everything once an agreement has been made! Lastly, consider if charging interest is worthwhile; interest charges help reinforce the lesson that there is a cost to needing money now and in the future (especially important with large sums). Having a written loan agreement also helps for estate planning purposes – if you die and are not paid back, the loan balance will be part of the borrower’s inheritance and won’t cheat your other heirs out of a fair share.

4. Take Command Of Your Living Space.

When parents decide to let their kids move back in, they must come up with a clear plan and expectations for the adult child before moving them in. One suggestion would be setting an agreement between parent and child which outlines rent prices or housework responsibilities like cooking dinner each night. If you want your children living under your roof longer than just temporarily after college graduation, then set target end dates such as when they find work at specific income levels so there’s some accountability on both sides of the equation. Setting these expectations at the beginning of the living arrangement will save you all grief down the road.

5. Consider Your College Payment Alternatives Carefully.

Tapping into your retirement savings to help make college more affordable for a child is a very difficult decision. However, there are other options available that you should consider first before bringing this drastic measure to yourself and your family’s future financial stability. Scholarships can reduce the cost of tuition for some students while low-interest deferred loans allow them to pay back their education expenses over time with cheaper monthly payments than taking out traditional student loans (or tapping into retirement funds) would be. Most students also have access to grants which provide free money towards school costs in exchange for work experience as well as an extension on loan repayments if they go unpaid at any point during repayment. So it may not necessarily cut short your own life solely because your child wants a degree!

There are many times when it’s natural to want to help a child or grandchild. But, there is also a right way and wrong way of doing so. A financial planner can guide you on how you should approach this situation for your financial stability and not be at risk while still helping out someone close to you that might need some extra money.

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