You give your time, money, and love to raise your children to be self-sufficient. So, what do you do when your now-adult-child asks for financial aid?
As more baby boomers retire, many find they are spending their savings helping their adult children in financial difficulty. It is a parent’s instinct to want to help a child, but if you are living on your retirement savings or are still contributing to fund your retirement needs, you need to be careful. If you decide to provide financial help to an adult child or grandchild, here are some guidelines to follow to avoid jeopardizing your own financial security.
Loan or gift? Under current IRA guidelines, an individual can gift up to $15,000 a year without filing a gift-tax return. Be sure to clearly state whether the financial assistance is a gift or a loan at the time it is given so that everyone has a clear understanding of expectations. Also work with your child to identify what budgeting or behavioral gap resulted in their need for financial assistance to avoid future requests.
Formalize the process For loans, particularly large dollar amounts, it is in everyone’s interest to formalize the specifics of the loan in writing. Leaving a loan open-ended reduces likelihood that you will be repaid and can create challenges down the road.
Focus on the essentials If you decide to tap into essential retirement savings to assist your child, offer to help only in an emergency with critical bills, such as insurance or rent. Explain to your child what you consider an emergency and avoid granting assistance unless it constitutes what you both agreed upon originally.
Only lend money you are willing to lose If you are in a financial position to lend your child money for non-essentials such as a down payment on a house or a business purchase, first be certain that you are 100% comfortable with losing whatever you lend and that it will not affect your own financial security. If there is any doubt that non-payment on the loan would cause you financial difficulty, do not lend money for such non-essentials.
Be in charge of your home If you allow your adult child to move back in with you, make sure they know what you expect before moving in. Consider a written agreement that outlines rent or expectations for household upkeep. Set a target end date or set of conditions that would necessitate the child move out.