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Banking On Mom and Dad

Many parents want to help their young adult children financially. But the wrong approach may mean grown children never learn financial independence and that parents run the risk of underfunding their own retirement.

If you’ve got grown children, should you help them financially? If you’re an adult and your parents offer to bail out your debt or front your home purchase down payment, should you let them—or should you resist their involvement?

These are complicated questions financial advisors hear often. Recent research from Bank of America indicates that nearly two-thirds of Millennials have received “some” or “a lot” of financial assistance from their parents, a higher degree of help than what their parents received when first starting out.

“It’s common for clients to ask about helping their children,” says Diane Bourdo, a financial planner and president of the Humphreys Group in San Francisco. But the wrong approach by parents can create thorny financial issues for both generations. What if grown children never learn financial independence and come to expect ongoing support, which can undermine their parents’ eventual retirement. Alternatively, parents can help their adult children slip into a lifestyle that they ultimately cannot afford.

Most parents who help their adult kids do so for one of several reasons—because they can, because they want their children to have more help than they once did, or because economic conditions and job prospects are challenging.

Young adults face a competitive job market and must typically assume more student loan debt than prior generations; as a result, many often live at home after college rather than independently. Meanwhile, their parents’ generation can claim them as dependents until age 26 for health insurance purposes. But both parents and adult children need to make sure they can manage money correctly before gifts are exchanged, advisors say.

Are you giving them a leg up—or crippling their independence?

Most often, parents come to advisors to talk about helping with what Bourdo calls “milestone markers” – help with a down payment on a home purchase, a safe vehicle, a wedding, their (or grandkids’) education, or a wedding. Saving for and paying the debt on these expensive milestones can hobble some young adults or force complicated opportunity costs, so it’s no surprise that parents with means want to help with these expenses.

Still, Bourdo cautions, parents don’t want to install their adult children in lifestyles that they’ll never be able to afford.

“You don’t want to over-gift,” she says. “We sometimes warn parents against helping a grown child buy a house they can’t sustain on their own.”

Rita Cheng, an advisor with Blue Ocean Global Wealth in Maryland, notes that every family situation is different. In one family she counsels, parents wanted to give a son and daughter-in-law roughly $28,000 to add to a down payment the young couple had already set aside, so that the couple could move to a slightly more expensive zip code with a better school district.

“The kids didn’t necessarily ask their parents for the money—they’d done their own saving,” she notes. “But the grandparents love knowing their grandchildren are nearby, within a strong elementary school cluster.”

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Is it a gift, a loan, or something in between?

It’s also important to clarify whether you want to make a gift, a loan, or some sort of joint venture (a down payment for a home that may involve an ownership stake, seed money for a business that may get repaid) with an adult child.

With financial gifts, each parent may gift a grown child $14,000 (as cash or securities) without tax implications—or $28,000 from a couple to the adult child. If the child has a spouse, the spouse can also receive these gifts from each parent, meaning it’s possible for a parent couple to gift a couple in the next generation up to $56,000 per year. Of course, parents should chat with an advisor and decide what they can share—rather than giving a gift they can’t afford—and then place a limit on the support they are willing to give.

When lending money to grown children, Bourdo says it may make sense to structure a loan as an “arm’s length loan.” This way, she says, “parents may be able to take a tax loss.” On the “borrower” side, if an adult child is borrowing money at a favorable rate from parents, they too should look at the tax pros and cons of the situation. For instance, if parents paid off student loans and the child is repaying their parents at a favorable interest rate, the grown child may be losing out on the tax deduction they’d get for paying their student loans themselves—or with a cash gift they then use for this purpose.

And finally, if the parent is taking a “stake” in an asset they’re helping a young adult buy—such as a piece of property—make sure there are clear contracts about how this will work. The adult child may come to resent paying into an asset they don’t really own or that isn’t really theirs, and adults may be putting that child in a property or situation they may want to exit later, as their life develops and plans evolve.

Teachable moment

“When children accept gifts or loans from their parents, it can be a teachable moment,” Bourdo notes, perhaps a time to bring the young adult into a financial planning conversation for the first time. “We sometimes recommend that clients give their child access to a small fund so they can practice.”

By practice, she means they could add to the savings, invest the money, or withdraw it incrementally, but with some custodial oversight.

When parents support grown children, they run the risk of entering retirement without enough savings—or forced to work additional years to uphold promises to their grown children. This may mean the children in turn will have to support their aging parents, effectively returning the money they received in gift or loan form. This may work fine—but sometimes, it’s not always an ideal scenario. Financial planning can help mitigate the challenges.

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