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Love or Enabling: The Risks of Helping out Your Grown Children Financially

We all want the best for our children. We give them everything we can in the hopes they grow up to be smart, loving, and successful adults.

For the most part we are proud of our children and their actions. We brag when they graduate college, we celebrate when they get a promotion at work, we feel overjoyed when they become parents themselves.

Like I said we most of the time we are thrilled with our children and the choices they make. But sometimes…boy oh boy…sometimes we just want to smack them in the back of the head and say to them, “What the heck were you thinking?!”

We frequently get the itch to do this when discussing their money and investment decisions. It takes a strong will and a lot of patience to sit back and bite our tongue while our children discuss buying brand new cars when we know they have debt or when they talk about taking a year off work to go see the world or how little they care about saving for their own retirement!

Even though many of their financial decisions leave us shaking our heads, in our hearts we want them to have an easier go at life than we did. We don’t want them to have to struggle financially like we did and that’s exactly what a study by the National Endowment for Financial Education found. Nearly 60 percent of parents who took the survey admitted to helping their adult children financially. Parent’s confessed the top two reasons they gave their children cash were that they were sincerely concerned for their child’s well-being and that they didn’t want them to struggle financially like they once did.

Legitimate concerns, but do you think the parents in the study ever stopped to consider the risks? Have you ever given your adult child money and thought about the potential negative outcomes of your actions?

For example have you ever considered that you might be hurting your chances of retiring on time? Diverting money earmarked for retirement can have disastrous consequences. You may have to work longer than you anticipated and you might not have the amount of funds you had hoped for in retirement.

Of course it’s important to help your child if you can, but not at the expense of your retirement savings. You do your children no good if you help buy them a car or funnel cash to help them cover their bills, but then must spend more time away from them working to make up for the financial strain you put yourself in.

When you haven’t fully contributed to your retirement accounts for the year ask yourself this: do your children know that the money they are receiving was meant to help you live in retirement? I doubt they would be comfortable taking money from you if they knew how important it was to your financial well-being.

You could be ruining your credit score as well. Before you co-sign a loan for them, or get them a credit card, remember that everything they do (or don’t do) with them will reflect on you. If they even miss just one payment, your credit score will feel the ding.

You may not feel the pinch right away either. In fact you probably won’t notice that your credit score has been hurt until you need it. The next time you try to refinance or apply for a car loan you may be unexpectedly rejected based on what your child has done with the account you helped them open. Be very careful to monitor re-payment plans of anyone you co-sign a loan or help open an account. It could come back to bite you in the ass.

To make matters even worse you might have to pay taxes on the money you give your adult children. Uncle Sam says unless the money is a loan with documented terms then it may consider the money to be a taxable gift.

The IRS says any transfer to another individual for which the value is not returned is considered a gift. And guess who pays the taxes on gifts? The giver.

The good thing is there are exceptions. As of 2013 you can give your child up to $14,000 a year without having to give Uncle Sam his cut. Married couples can double that amount and give each of their children up to $28,000 a year tax free. Best of all, if your child is married you can give the same amount to their spouse tax free. That brings the exception up to $56,000 a year you can give to each of your adult children before having to involve Uncle Sam.

If you give your children more than that amount in any given year you won’t necessarily owe taxes right away. There is a lifetime exemption that is pretty steep (over $5 million for individuals and over $10 million for married couples). Only when the total of all your gifts throughout the years exceeds the lifetime exemption limit will you owe taxes. If you are a high net worth individual this factor may come into play for your heirs when you pass on, so make sure to talk to a tax professional before giving any of your money away.

Aside from the retirement, credit score and tax implications many parents don’t consider how their financial bail outs are affecting their child’s future behaviors. Do you consider yourself an enabler? You might be if you continually provide financial support to your adult child. You see it as $200 here, $50 there, but the reality is you are enabling your child’s bad habits. If your child is bad with money, is a chronic over spender or has other issues that lead to money problems then a different approach might be warranted.

Furthermore you must consider the feelings of your other children who you are not bailing out. They may feel resentment or feel that they are being slighted because they do not have money issues. This can bring tension into the family unit.

The most helpful thing to do is to keep the lines of communication open. Talk with all of your children about the reasons behind providing financial support to one child over the other. Make sure they understand that you love them just as much as their cash strapped sibling.

Of course no parent should feel guilty about helping out a child who runs into an emergency or experiences a short term crisis. But if you do find yourself continually bailing your child out of sticky financial situations you may want to consider an alternative approach. It may help to explore non-financial ways you can help your child.

For example you could allow your child to temporarily move in with you. Consider making them pay you rent which you place in an account (in your name only) that you will relinquish to them only after they have paid off all of their debts and found a new living arrangement. It provides them monetary incentive to correct their bad money habits and move back out!

You could also provide childcare services if your children have children of their own. This is a great way to still help out your child with their bills without giving them cash they may blow right through. It’s also a great way to spend quality time with your grandchildren if you so desire.

If what your child needs is cash to get themselves out of a jam and nothing else will do consider making it a loan instead of a gift. Draw out a repayment schedule with a clear end date. If possible include penalties for missed payments. This will help to make sure you don’t put yourself in financial straits as well as show them you are not a doormat they can walk all over when it comes to money.

My final recommendation is to just say no. If you are not in the ideal position of providing financial support to your child, then no one will fault you for denying their request. You have less time than they do to make up for any financial hits to your savings or retirement accounts when you put your child’s needs before your own. Use the opportunity as a teachable moment to get your child on the road toward self-reliance.

Good luck!

Keeping Money in Your Pocket,

Nancy Patterson


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