How Not to Become the Financial Caregiver Once Kids Grow Up

You may have known what to expect when you were expecting and how to talk so kids will listen and listen so kids will talk. But parenting experts never addressed what to do when your adult child asks you for financial help.
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You may have known what to expect when you were expecting, what to expect during the toddler years and how to talk so kids will listen and listen so kids will talk. But parenting experts never addressed what to do when your adult child asks you for financial help.

It's an unfortunate trend, but according to the National Endowment for Financial Education, nearly 60 percent of parents provide financial support to their adult children (up to age 39). Many do so at their own fiscal peril. It's hard to say "no" to a loved one in need. But while I'm all for opening your heart, I suggest you consider the following "Dos and Don'ts" before opening your wallet.

1. Don't Put Yourself in Financial Jeopardy. Before agreeing to give your child a monetary gift, make sure your own nest egg is secure. Young people have a lifetime to build their savings or pay off debt, but loans to fund your retirement are more difficult to obtain. I've seen parents who would rather decimate their own net-worth than see their child struggle. But this will only hurt you and your family in the long run.

2. Do Give a "Hand up" Rather than a "Hand Out." Look for ways to help your child that don't involve a financial bailout. Offer to help them set a budget, shop for a loan, find a job or start a business. Let them move back home temporarily as long as they contribute by doing chores or helping with expenses.

3. Don't Over-indulge. Determine whether the request is for a "need" or a "want" and weigh your response accordingly. If your child needs help with medical bills, fine. If your child needs a few more credits to get her degree, maybe. But if your child is simply looking to enhance her lifestyle or keep up with the Joneses, tell her to go to Jones Sr. for help.

4. Do Talk Honestly. Money is a loaded topic and can cause all sorts of emotions -- such as guilt, resentment and anger -- to rear their ugly heads. Some children have never learned to take personal responsibility for the bills or their money and have no idea that their parents would be sacrificing, even struggling, to help. Both you and your child should be upfront in discussing the needs and requirements of the family when it comes to money.

5. Don't Blindly Co-sign a Loan. If your child asks you to co-sign a loan, understand that you are assuming many risks and that a professional lender may consider your child too great a risk to take on alone. If your child does not pay the debt as agreed, you will be held responsible. If your child is late making payments, it will appear on your credit report and could have long-reaching affects. And if your child defaults and you don't make the payments, not only will your credit rating suffer, but the bank can sue and get a judgment against you for the amount of the loan plus interest.

6. Do Structure a Family Loan. If you agree to lend money, write out the terms of the loan so that you and your child are clear on the arrangement. Include the amount of the loan, the payment schedule, the interest rate charged, whether it's compound or simple interest and what recourse will be taken if your child fails to make payments on time or in full. Have both parties sign it. The more seriously you take the loan, the more seriously your child will take it, too. Be aware that there can be tax implications if you lend more than the allowable IRS limit. Talk to your accountant or tax attorney for guidance.

7. Don't Enable Bad Behavior. Requests for money shouldn't be chronic or come with a sense of entitlement. There's a difference between a child who handles his money well, but needs help covering an unexpected expense and a child who has a poor work ethic, lives beyond his or her means or continually comes to you looking for a hand out. Enabling irresponsible behavior only perpetuates this cycle and could turn you into a permanent financial caregiver.

8. Do Set a Firm Financial Limit. Establish a limit as to what you can comfortably give, and never lend money your family can't afford to lose. If you're considering giving a substantial amount of money, keep an eye on the annual gift exclusion set each year by the IRS. (For 2011 it is $13,000.) Seek the advice of your trusted financial advisor to help you in this process.

This information in this article is general in nature and may not apply to your own financial situation. Please consult your own professional tax, and/or financial advisor regarding this information and your own personal financial needs. For a complete disclosure statement, please see my biography.