How Can Parents Help Adult Children with Financial Issues?

“There are times as a parent when you realize that your job is not to be the parent you always imagined you’d be, the parent you always wished you had. Your job is to be the parent your child needs, given the particulars of his or her own life and nature.” ~Ayelet Waldman

For those of us who have children, the months of May and June, with Mother’s Day and Father’s Day, remind us how important we are in our children’s lives. My mother used to tell me that “When God turns a mother on, he never turn her off.” So we are always the parent. It doesn’t matter how active we are in their lives, or how far away they live, or how independent they are; being a parent starts at birth and goes on and on in some way or another.

Some of the most difficult conversations that we have with our clients about their financial situations are those that have to do with parents who are caring for adult children. This situation may arise because the children have health issues or special needs; lost a job; went through a divorce; incurred bad debts; or made lifestyle choices that have brought them back to being a dependent in some way. And this situation takes many forms: the children may live with the parent; they may live on their own but can’t afford the bills; they may have incurred debt they cannot pay; or they may have asked the parent to cosign for college costs, their first house, or some other financial need.  And with the recent recession, jobs being scarce, foreclosures hitting all time highs, and student debt soaring, it isn’t uncommon for adult children to take refuge in the homes of their parents.

In the end, it doesn’t matter why the children are dependent as adults; what we try to focus on is how the parents can best manage once again assuming the job of caretaker to the child in their adult life.  All parents can probably understand this situation, even if they don’t agree with it.

In most cases, the issue with supporting an adult child is that it may be detrimental to the parents’ financial health and detrimental to the child’s financial independence.  Unless the parents’ funds are unlimited, this choice comes with serious potential consequences.

But you are a parent. And you want to help. Or you have a child who, for health reasons, you will always need to be there to help. As in most situations, there is a right and wrong way to help.

A parent providing a monthly income is a wrong approach. It will end when you do…and then what will happen? Parents providing a significant down payment on a house for the child is another wrong approach. If your child is buying a home and cannot afford the down payment, chances are this is a house the child cannot afford. Providing all the money to help the child start a business is another wrong approach. This makes you a partner in the business, and if it defaults the creditors will come after you for the money. Finally, reducing your retirement assets to provide money to the child is a wrong approach. A serious family meeting should occur before this is even a consideration. Your financial health is at risk; and if you have other children, the continuity of the family can be jeopardized if one child is favored over another.

But…if you have adequate assets, gifting from you to your children may be a great idea. Loans to a child for a business or home purchase may also be the right thing to do. Drawing up a contract and charging interest on the loan is a good idea and it can work well. If you have multiple children, reducing the dependent child’s portion of your estate may also be right. Not only is it a lesson learned, but other children who have not received help are more likely to feel they have been treated fairly. The “Sink or Swim” approach can be a good idea, too. It might sound a little heartless and unfair, but if you are providing assets and financial assistance for a child, you need to believe that when the time comes when you are out of assets and need help, they will be there for you in return.  If this isn’t likely to happen, then “Sink or Swim” could be the right thing to do. Establishing special needs trusts may also be the right approach because they can keep you financially secure and help your child in the short- and long-term.

The fact is, as parents we want to help our children with their financial situations and we think this is what any good parent would do. Just remember: Helping our children with their financial situations by teaching financial responsibility, modeling wise financial decisions, and making them independent is what makes a good parent great.