Published in the July 5 – July 18, 2017 issue of Morgan Hill Life
By Dan Newquist
As Morgan Hill baby boomers reach retirement, they are finding their savings diminished due to unrecognized overspending. For some retirees, they found much of their savings went to financially helping their adult children. According to a 2015 TD Ameritrade survey, parents who supported adult kids gave them an average of $10,000 during the previous 12 months.
Even parents who have taken a hard line against bailing their adult kids out of financial trouble have softened their stance in the face of the economy and its fallout. If you decide to provide financial help to your child or grandchild, follow these guidelines to avoid tapping into your own savings.
Loan or a gift? Parents often start out resolved to make their child repay the money but fail to follow through. Keep in mind you can gift up to $14,000 a year (for 2017) without filing a gift-tax return. If you call it a gift, don’t harbor expectations it will be repaid. One strategy is to aim for a one-time gift. If you can spare the cash, give your children a lump sum for them to budget rather than paying their expenses or paying off debt, and make it clear that’s all you’re willing to give. This will generally force them to stretch the funding and cut out nonessential expenses.
Only offer essential assistance. If handing over a chunk of cash is not appealing, offer to help pay for only a few critical bills, such as health insurance or car insurance, so coverage is never lost. If you decide you will or can help your children only in an emergency situation, make sure you stick by this. Explain to them in detail what you consider an emergency and avoid granting any assistance unless it constitutes what you both agreed upon.
Make this as formal a process as possible. If you decide to lend your child money and have them repay you, consult with a tax advisor to set a reasonable interest rate in accordance with IRS rules. Charging nothing or too little could result in the IRS considering that unclaimed interest as income to you and a gift to your child. Set a repayment schedule. By leaving it open-ended, you will be less likely to be repaid, ultimately creating hard feelings.
Be in charge of your home. If you allow your children to move in when they can no longer afford rent on their own, make sure they know what you will expect before they make the move. Create a written agreement that outlines rent or how the child will contribute to the household in lieu of rent. Set a target date or a set of conditions that trigger the child moving out — such as finding a job at a specific income level. Review the agreement regularly to determine if any changes are needed. One idea is for parents to let their kids stay at home for a given number of months, then begin to charge rent after that. You may also consider increasing rent monthly in $50 increments until it would eventually cost more to live with you than on their own.
Weigh the consequences with other options. If you have to tap into your retirement savings to help your child financially, look at other available option first. For example, while you may feel it necessary to pay for a child’s college education, you shouldn’t draw from your retirement. Some financial obligations need to remain with the child. Students have access to grants, scholarships, low-interest deferred loans and student employment. Discussing the options with your child and a financial planner can help you determine if there are alternatives.
Wanting to help your child or grandchild during times of financial stress can be well intentioned. With planning and guidance, loaning or giving your child money can also be well executed without burdening your own finances. A financial professional can help you determine the impact a gift or loan may have for your own lifestyle or future plans.
Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor. He can be reached at (408) 779-0699 or dnewquist@RNPadvisory.com. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
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