In our firm, we have recently seen a number of situations where adult children have run into personal financial problems and they are turning to their parents for help. We all want to help our children be successful throughout their lives. But when the “children” are in their 40’s or 50’s, and the “parents” are facing their own financial concerns, the answers are never easy. These situations demand an objective perspective that blends the financial, tax planning, and family issues into strategies that work for the entire family.
The first step for a parent in this situation is to get a good understanding of the nature of the problem. Nobody can deny that we are in challenging economic times with companies downsizing, overextended credit creating cash flow issues, and a real estate market that has taken a serious downturn. Evaluate the situation and decide is it a true financial hardship, or are there other root causes to their child’s problems?
Try to determine where your help might be best applied. Getting the full details of the child’s financial situation provides a good starting point. Have they done all they can from their side to solve the problem? Are they really taking steps to control their cash flow situation? What steps have they taken to restructure their mortgage or other debt? These are important questions to ask before a parent steps in to help. There is a fine line between truly helping out and enabling the child to continue unhealthy financial habits. Do they have a continual overspending problem, or are they just trying to get through a particularly rough patch in their personal finances?
Once you have a full picture of your child’s finances, you then need to really ask if this is something you can afford to do. Understanding the sufficiency of your assets is the most important step in this process. What would the impact of helping be on your own personal financial situation. We are all living longer and medical costs later in life are rising, both factors that need to be considered in this analysis. Where would the funds come from and how does this impact your investment strategy? Taking money from your IRA where it would be fully taxed, to help a child, has different implications than taking it out of a non-retirement account. You also need to be aware of the gift tax rules. You can gift $13,000 per year per individual without using any of your lifetime estate/gift tax exemption (currently set at $5,120,000 for Federal). You can gift more than this without paying gift tax today, by using a portion of your lifetime exemption, but you want to make sure you understand any impact on your estate planning. Assistance can also be structured as a loan that will be paid back (or forgiven) over time or at your death.
Another concern that is often raised is the issue of equality among your heirs. If there are other siblings, are you taking steps to make sure you are consistent with the way you want to treat them all in your estate plan? The last thing most parents want is to create family in-fighting because of assistance they provided to one child over another. Money is certainly one of the primary issues that cause strains on family relationships. We have seen a number of clients “deduct” these loans from the child’s share of the estate at their death.
As a CPA/financial planner, we often work with multiple generations of our clients’ families to address personal financial issues. We work hard to give objective advice that looks at the problem from all perspectives, trying to find the best solution for the family overall. Let us know if we can help you address these kinds of issues in your own family.
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