When to Cut the Strings
Most kids are anxious to leave the nest and cut their financial ties with their parents, but there are some who seem to never manage that transition. It's important to look at the role you play in helping your kids build financial independence. Be aware that you may be encouraging them to stay dependent on you without realizing it.
Cosigners on a loan are both responsible for the repayment of that loan. Avoid cosigning a loan for your child unless it's absolutely necessary. If you do cosign, ask to receive duplicate statements from the loan company so you can be sure the payments aren't missed.
When Is the Time Right?
The sooner you stop financially supporting your kids, the better for both of you. They need to learn to support themselves. If your kids are still in high school or college, this is the time to start communicating that their allowance ends when they graduate college — if not before. Remember, the key is to be clear and consistent. Many parents are surprised to find that the money they think they're giving the kids to help support them is actually keeping them from thriving. Allowances and gifts can send the message that you feel they still need your help. They'll continue to rely on you instead of making sure their career or work supports them.
Advice and education can go a lot further in helping your kids than simple cash handouts. If you think they're struggling, offer education and guidance before money. Pay the fee for them to meet with a financial planner. Offer to pay for financial planning classes or courses on money management. Buy them books on personal finance as gifts. Finally, share your own financial planning process with them.
Can I lend my child money for a house down payment without making the money a gift?
Certainly. Your attorney can create an agreement that you both sign outlining the loan details such as interest and payment schedule. Beware: the mortgage company considers this loan part of your child's overall debt when they consider the mortgage application.
Helping and Gifting Through Life
Many parents and grandparents enjoy giving a regular annual cash gift to their kids and grandkids. This practice is often encouraged by the family's estate planning lawyer as a way of shrinking the elder's estate. The idea is to give the kids their inheritance early and to reduce potential future taxes on the grandparent's estate — saving everybody money. If this is your case, try to give the gifts in a way that enhances the recipient's investments instead of her lifestyle. Many givers simply write a check each year in the amount the tax law allows and their attorney recommends. A problem can arise when, after a cycle or two, the receiver starts to rely on the annual gift. By giving cash, the giver has encouraged the child to expand his lifestyle beyond his own income.
Instead of giving cash, ask your adult child to open an investment account for you to make your transfers to each year. Make it clear that you see this transfer as an addition to his wealth, not a supplement to his budget. Tell him you're making the transfer as part of your own financial plan, and be ready to stop the gifts if they are having an unintended impact on his finances.
If grandparents or other family members want to help pay for college, talk to the college's financial aid office about having them write a check directly to the school. In some circumstances, this direct payment won't affect the student's eligibility for aid, and payments made directly to colleges don't count toward the tax laws limiting gifts.
Instead of regular gifts, many parents look forward to one-time gifts to help kids with big-ticket items such as home down payments or college savings for grandkids. This can be a great way to help, as long as you consider the impact on your child's lifestyle. If you'd like to help with a house down payment, make the amount suitable for a down payment on a house your child will be able to afford, not to help him buy something bigger than he could on his own. If you'd like to help with college, give regular gifts to your grandchildren's college accounts instead of verbally committing to pay the full freight when they get to college age.