When you see your adult child’s name come up on caller ID are your first thoughts, “oh no, how much is it going to cost me this time?”
We want the best for our kids whether they are babies, toddlers, teens, or as adults out on their own. Have you ever caught yourself saying or thinking, “What can I do, I’ve got to help, she’s my daughter”, but this has gotten out of hand! Falling victim to this behavior can be a destructive scenario for both the parent and the adult child.
Financial support of an adult child can have very negative impacts on the parents ability to retire with a sense of financial stability. The adult child may falsely learn, mom and dad will always be there to bail them out. Parents may feel guilt and anger that their child keeps asking for money, but if they are not willing to help their child learn a new behavior, most likely the pattern will continue.
Helping today does NOT help them down the road
Odds indicate most children will outlive their parents. If your adult child keeps asking you for a handout today, it is important to think ahead to how they will or will not get by after you pass away. After you are gone, how will they make ends meet? Maybe your savings are ample enough that your child will eventually inherit a large lump sum of money. However, do they have the financial life skills to know how to manage an inheritance? If they don’t know how to take charge of their finances today, most likely they will blow through their inheritance quickly. Then what? Who will be there to catch them?
Teach a new behavior
Both you and your adult child will need to adopt new behaviors. It’s not too late to learn and you can do this together. First, set your own budget, then lead by example and help them create a budget too.
Help them keep track of their income and expenses and try to forecast unusual or large expenses like new tires for their car. Have them write down their income then deduct all of their fixed or required expenses (rent/mortgage, utilities, food, insurance, gas). If there is money left over, this can be used for savings and to pay for discretionary expenses like eating out, hair, nails, clothes, entertainment.
When you anticipate your adult child will require your financial assistance, having carved out your own budget first, allows you to realistically know how much you can afford to give away. If your child is careful with their money, but still come up short each month, at least you will know how much you can or are willing to provide without causing your own financial distress.
Your finances should be under your control… not your kids
If your adult child makes a purchase that is outside of the scope of their budget, consider doling out tough love instead of cash. They may need to make adjustments to their lifestyle. “The biggest challenge is providing enough money to help a child through a challenge, but not giving to the point where it kills the person’s motivation to work and succeed” (Morrissey, 2019). Should you still have to drive that 10 year old car only to be supporting them so they can scoot around in a flashy new car? While working with them to create and follow a budget you will be able to quickly see the financial gaps and have talking points about why you will no longer fund their lifestyle.
Your child is good with their money, should you loan them money?
Maybe your adult child is ready to make a big ticket purchase. If they are a good steward of their finances and you are in a position to help, you may want provide them with a loan. Even though this scenario sounds good, it is wise to jot down the terms and keep a running total as they pay you back over time. This will help mitigate any misunderstandings or miscalculations.
Does the IRS care if you lend money to your kids?
Most often if you handout petty cash to your kids the IRS is not interested; however, if you gift or lend big money you should do so with the understanding of how this may impact your taxes. You should first consult your tax professional for guidance. Let’s consider some examples, your son or daughter asks you for a large lump sum so they can use it as a down payment on a home purchase. If you charge your child interest, when you receive repayments, you will be collecting interest income which needs to be declared to the IRS. If you don’t charge interest on a big loan, the IRS will consider this to be a gift. Guess what? If the sum exceeds the annual gift tax exclusion, which is $15,000 in 2021, you as the donor may be subject to paying gift tax (2020 IRS.gov).
Both good and bad money habits are a learned behavior. If you feel obligated to help, begin by creating your own budget then help them create their own. Dolling money out to your kids on a regular basis will have a big impact on your own financial well being in retirement. If the sums you provide your child are large, consult your tax professional so you are aware of how this may impact you at tax time. For additional information about parent-child money decisions, check out some interesting reads from The New Your Time: Thinking About Giving Money to Adult Children? Think Again and MarketWatch: Opinion: When your adult children keep asking for money, here’s what to do. Finally, if you recognize yourself being an enabling parent, learn it’s okay to just say NO.
About the Author
Author, Marianne Martini Nolte, Certified Financial Planner ™ practitioner, provides fee-only, fiduciary, independent financial services. Her firm, IMAGINE FINANCIAL SERVICES (IFS) is a registered investment advisor offering advisory services in the State of California and in other jurisdictions where exempted. Marianne’s focus is serving Women and Young Professionals from generations X, Y, and Z. This article is intended as a high-level view.
All written content is for information purposes only. Opinions expressed herein are solely those of IFS, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness.
For more in-depth information, please reach out:
Marianne Martini Nolte, CFP®
Imagine Financial Services
Phone, (760) 472-5155
Frequently Asked Questions on Gift Taxes. (n.d.). Retrieved August 28, 2020, from https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
Morrissey, J. (2019, November 6). Thinking About Giving Money to Adult Children? Think Again. The New York Times. https://www.nytimes.com/2019/11/06/your-money/parents-children-money-advice.html.
Stettner, M. (2019, March 16). Opinion: When your adult children keep asking for money, here’s what to do. MarketWatch. https://www.marketwatch.com/story/when-your-adult-children-keep-asking-for-money-heres-what-to-do-2019-03-14.