Approaches to financial assistance have advantages and pitfalls
Adult children are driving Baby Boomers bust. Or so I hear. We're biologically programmed to help our children, says wealth coach and author Joan Baker. But what's the best way to deliver that help?
The dilemma, says financial adviser Michael Cave of Quantum Broker Group, is that "kids" that inherit big lump sums of money in their 50s and 60s often wished it had come decades earlier.
Give it to them age 30, when they actually need the money, and then the younger generation may become indolent. Why work hard if the house is paid off thanks to Mum and Dad?
Cave cites a biblical proverb: "Getting rich quick may turn out to be a curse." A bonanza at the beginning is no guarantee of blessing at the end, he adds.
Parents fall into three general camps when it comes to helping the children financially:
* Those who want to help and do
* Those who would like to help, but can't afford to, and
* Those who cut the financial umbilical cord forever.
How to help?
There are several possible approaches: gifting money, lending, going guarantor on loans, giving advice not money, or helping out indirectly by allowing the children to move home and live cheaply.
Moving back home. I keep reading articles from overseas about how to help the not-so-young to leave home. Conversely, some parents also want their children to stay home to get ahead financially.
There are many advantages for both generations in the older children staying home. It is financially advantageous for the younger generation. Even if they just pay their share of food, utilities and other costs such as general wear and tear, they will live more cheaply than if flatting.
Having the kids around should keep the parents young and active. They can enjoy the grandchildren more if they're living under the same roof and the parents have live-in carers if they need them.
On the other hand adult children may treat the opportunity as a free ride. If they're getting a $100,000 lifestyle when they're only earning $13 an hour, says Baker, parents are setting the children up for a fall.
Lending, gifting, and going guarantor. Lending or giving chunks of money can help the children into their first home or business, or to pay off student and other debt. John Cowan of the Parenting Place says give the money if you can, rather than lend it. "If friends or family owe you money it's introducing tension."
There are, however, reasons to lend. Gifting comes with some legal fish-hooks. One is the Property (Relationships) Act. If the money is given as a gift and the couple splits, the son or daughter-in-law could take half, says Cave.
The other legal minefield relates to the residential care subsidy for rest homes. Although gift duty is history, Work and Income adds gifts of more than $27,000 a year back in when it is calculating if an individual is entitled to a subsidy.
Goldridge authorised financial adviser Bernard Long says there is a right way and a wrong way to lend money to adult children.
The wrong way, he says, is to lend the money in an unstructured way. The right way, says Long, is to keep it removed from your personal situation by doing it through a family trust. This makes the loan from the third party and places a responsibility on both parties to adhere to the terms and conditions.
An alternative, says Long, is for the family trust to raise a mortgage (or borrow against an old whole of life policy).
Going guarantor. It's easy to go guarantor, but risky. The parent doesn't need to hand any money over, just sign on the bottom line. The trouble is that most such documents include unlimited liability.
The parent may think he or she is guaranteeing a $20,000 or $50,000 house deposit. In reality they have just agreed to put their home on the line for any subsequent house or credit card lending, business debt, car loans and even the huge amount of credit the daughter or son-in-law racks up secretly in the weeks or months before he or she walks out of the marriage.
Document the agreement. Whatever the arrangement, it needs to be well thought out. Having the children move in then working out the details can lead to bad blood on both sides. The same can be said for lending and gifting money.
"Get it agreed and witnessed, even if it is for a relatively small amount," says Cowan. "Tell them it is not because you don't trust them, but just so that there is no misunderstanding."
What can you afford?
Cowan says parents should lend only what they can afford. "The fact that you have a credit balance in the bank or assets does not automatically mean that you are in a position to lend."
Ask yourself, he says:
* Does the money that you could lend represent some aspect of your future security?
* Are you risking your house or livelihood for someone?
* Is your spouse happy with this, especially if it is a loan to a child from an earlier relationship.
* Could you handle not being repaid?
* Are you really doing them a favour by letting them have money?
Parents also need a way to say no, says Cowan. "Try the line, 'I have a friend who I always like to check these things out with. I'm happy, but I'm going to pass the decision overt o him.' And then pass it all on to your accountant, who will play the bad guy for you."
Be cruel to be kind. Some financial professionals believe the children need to be left to sink or swim and learn from the experience.
Money coach Jill Porter of Financial Clarity is in that camp. She gets to see cases where it goes wrong.
One couple had got themselves $100,000 into debt, yet continued to pay the interest on their university-age son's credit card. He needs to be cut adrift.
Although Baker comes from a large family where there is mutual help, she believes it's better to help the next generation learn rather than hand money on a platter.
"You wouldn't want to let the children end up in a Turkish jail," she says. "I wouldn't be worried, however, about someone repossessing their car", an experience they could learn from.
What's more, says Baker, if the bank has turned an adult child down for a loan parents should be very wary about lending.
If parents do lend or gift money or guarantee a loan, they need to do it with their eyes wide open, says Baker.
Parents don't have as long left to recoup any losses.
Elder abuse. Those who would like to help but can't afford to can be taken advantage of. Children may see their parents' money as their birthright, says Financial Education and Research Centre director Pushpa Wood.
She has seen cases where access to the grandchildren is withheld until the parent provides money for a house deposit. Parents are sometimes put under pressure as well to guarantee loans.
What about unscrupulous children who figure Mum and Dad's KiwiSaver payout at age 65 is ripe for the picking? Wood is unequivocal: "It is a time bomb waiting to happen."