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The Pitfalls of Subsidizing Adult Children

With home prices hitting historic highs and incomes remaining relatively flat, some adults turn to Mom and Dad for financial assistance. Baby boomer parents appear eager to open their wallets. Almost a third of working Americans 45 and older with a child over age 25 pay rent or provide housing for their offspring, according to a recent survey conducted by Brightwork Partners for Putnam Investments.

But there are potential pitfalls for both sides when adult children tap the First National Bank of Mom and Dad, experts say.

“If I save up a down payment and buy a house, I have a different experience than if my dad says, ‘Here’s a check for $50,000, go buy a house,’” says Karen Sheridan, a money manager and author based in Lake Oswego, Ore. “You have to do it on your own so you get to be who you are, make your choices and mistakes, and feel your own successes.”

Sheridan recommends that parents consider a dollar-for-dollar match toward the goal, rather than writing a large check. “A parent might offer $100 for every $500 the child saves,” she suggests. “That’s helping a child step up to the plate of adulthood.”

Other counselors say the decision depends solely on the relationship between parent and child. “I think doing things on your own is one thing, but having to be completely alone in the world is another thing,” says Olivia Mellan, a Washington, D.C., psychotherapist and author, who’s specialized in money therapy for more than two decades. “It’s OK as long as the person is not disempowered by the loan.”

Borrowing from parents may be unavoidable in the nation’s hottest housing markets. “A lot of people would never be able to buy their first house in California without some help,” adds Karen McCall, a financial counselor and founder of the Financial Recovery Institute in San Rafael.

But beware the parent who uses lending to keep children emotionally indebted, McCall warns: “Some parents are invested in being needed by kids. There may be strings attached. The parents help a child buy a house or do whatever, and then they feel they have a say over what the kids do with their money.”

Sheridan agrees. “Parents are not the bank — they are emotional. They may say, ‘Why are you putting central air in? You don’t need that.’ Or ‘You buy this new BMW but had to borrow money from me for the house?’”

Talk about parents’ expectations upfront, outlining the worst-case scenarios: What happens if you default on the loan? Clarify that the money toward a home doesn’t give parents a vote in your design or other decisions. Put everything in writing.

Consult a financial advisor to ensure the promissory note is written properly. For example, with a mortgage loan, the Internal Revenue Service may require that the interest rate be tied to a specific benchmark. There may be gift tax consequences if the parent forgives a large obligation.

Meanwhile, realize that borrowing can quickly become an ugly family affair. Children who hit up parents for money should be prepared for the resentment of siblings who don’t — and potential squabbles over the parents’ estate, experts say.

Beyond home buying, many parents subsidize adult children in other ways. Some 45 percent of middle-aged workers with grown children provide financial support of about $2,500 a year on average, the Putnam survey found.

“There are millions of Peter Pans of the financial set,” says Sheridan. “I see this more and more. When I meet with a new client, I always ask about their adult children. Many times they are paying for one adult child or more.”

Before they give, parents should consider whether the money is to enhance a child’s future or subsidize his lifestyle, and make a distinction between a one-time event and a chronic condition, Sheridan suggests. For instance, she says she helped her daughter with medical expenses after the daughter’s twins were born prematurely, and a mediocre health insurance plan saddled her with tens of thousands of dollars in hospital bills.

That’s very different from children who continually seek loans to pay off credit cards, or investments in a series of get-rich-quick schemes, Sheridan says. “The bottom line is, is the child completely independent of you in all ways, including financially? Then it’s OK to make the offer to help.”

Finally, borrowers should be certain parents can afford to give or lend the money, advisors say, because some parents compromise their own security to help their children.

Do you want to borrow money now, and later find yourself in the position of supporting elderly parents along with your own children? The Putnam survey, for instance, found roughly one in five workers age 45 and older provide financial support to a parent.

“I see that all the time, parents who have children in private school but no savings for themselves,” says McCall. “As they say on airplanes, put the oxygen mask on yourself first. We’re all going to get old someday — we should be modeling for our kids that we’re going to take care of ourselves.”

“It’s much better if parents don’t offer and children don’t ask,” adds Sheridan. “Then you have very clear relationship lines that aren’t muddied by money. A child who borrows never gets that opportunity to really be on her own. That creates anger, anxiety, and a feeling of vulnerability. You don’t have the same life experience if you always have a safety net.”

(Adapted from my Yahoo!Finance column)

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One Response to “The Pitfalls of Subsidizing Adult Children”

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    [...] bail out adult children and when to cut them loose. I’ve written about potential pitfalls of parents subsidizing their adult children financially; some psychologists call it dangerous, others see no harm if it doesn’t undermine the [...]


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