How you help your kids get settled once they leave the nest will have an important effect on their future money habits and your financial relationship. Whether you encourage them to move back home to help shore up their finances or use your assets to gift or lend them money to help with a home down payment, it's important to make financial transactions with your grown children as businesslike as you would with a nonrelative. And the kids may not be the only ones who benefit when they move back home — planning to live with them in your old age can serve everyone's needs. If you think you may want to do that, this is the time to start planning.

Moving Back Home

Living together for a short time to help a child build up her finances can be a better alternative than simply giving her money when she needs it. People are always more careful with money they've earned than money they've been given. If your child has moved back home, help her set up a budget that includes covering her living expenses — including rent to you — and her savings plan and debt repayment. Have her create investment accounts for her home down payment or first and last months' rent and emergency fund. Also budget the period of time she is going to live with you; a specific expectation of the number of months or years before she lives independently is very important.

Down Payment Ideas

If you have the cash, it can be tempting to give your child as much as you can budget for his home down payment. This can be a problem if it gets him into a house he would otherwise not be able to afford. Getting your kid into a neighborhood where he is trying to keep up with the more-affluent Joneses or into a huge house that is too expensive for him to maintain is a recipe for insolvency and foreclosure. Instead, back into the amount you should give him by assuming he already has a 20 percent down payment. Then figure out how much he can afford for a monthly payment on a mortgage, real estate taxes, insurance, and maintenance. The total must be less than one-third of his income. Use his monthly payment target to calculate the mortgage he can afford, then gift him with what you want to give him toward a 20 percent down payment appropriate for his budgeted mortgage.

Private Mortgages

Many families are using private mortgages to help solve two problems: giving the child access to a mortgage at a reasonable interest rate and giving the parents a chance to invest their money at higher interest rates than they could make in other fixed-rate investment.

Don't lend money to your kids on a handshake. Your attorney or a service such as Virgin Money (www.virginmoney.com) can create loan documents and a payment plan that spell out the details of the loan and keep your transaction safe from the gift limit restrictions.

In-Law Planning

In-laws and their kids can live together and still give each other privacy. Sharing a duplex or a house with an in-law apartment are two of the more common ways kids and their parents live together while keeping their own space. Talk to your real estate attorney about whether you should own the property jointly or whether the property should be owned by a separate legal entity such as a real estate partnership or limited liability company. Your attorney will help you work out the liability and estate-planning issues, and your CPA will help you with the tax planning. These professionals will be an extra cost to setting up and managing this relationship, but don't skip consulting them and risk having a problem later.

Beyond the technical aspects of buying into property together, plan several business meetings with your family before you make the change to understand what everyone's wants and needs are. Set boundaries about who is going to take care of what household chores, and even how many evenings per week you are going to take care of your grandchildren. Having it in writing helps assure that no one misunderstands when the time comes to actually take action.