Should you open the bank of Mom and Dad?

Jun 25, 2018
Mother with adult son

Imagine that your adult child tells you about a business idea – Mall Doggie will be a service at malls where customers pay to have their dog cared for while they shop. All that’s needed to get this start-up off the ground is your money. Your child suggests either a business loan, an investment for equity, or perhaps an advance on their inheritance. What do you do?

When it comes to helping children financially, there are no financial planning rules to follow. What works perfectly for one family might be unthinkable for another. There are, however, important factors to consider, which can guide you in making a decision.

A personal decision

It all starts with your position on the timing of an inheritance, and there are two basic schools of thought. The first is giving while living. It’s based on the idea that a full or partial inheritance when your children are in their 20s or 30s will put them on a path to fulfill their personal and family goals. If children only receive money through the will, they may already be established or possibly retired when the inheritance arrives.

The other approach is all about preventing affluenza, based on the worrisome effect of unearned affluence on a child’s character. Will children who receive an early inheritance become lazy and develop a sense of entitlement? Many parents, proud of working hard or smart for their wealth, hope to nurture the same diligence and intelligence in their children.

For some parents, the solution is to strike a compromise. You gift children enough funds to help meet life’s needs and goals, but not so much that the partial inheritance diminishes their initiative and work ethic.

The responsibility factor

Whether or not to open the Bank of Mom and Dad is also based on the adult child’s character, maturity level and degree of financial responsibility. Say, for example, a parent believes in the theory that it’s ideal to give while living, when the child is relatively young. But the adult child lacks financial discipline – spending wildly, living way beyond their means and accumulating enormous debt. The parent fears what will happen to an inheritance and, in this case, decides it’s best to wait.

Economic realities

Let’s say a parent believes the inheritance should be given through the will, so the child maintains a sense of independence throughout life. But the child and child’s spouse are working, sinking money into rent costs, and lack the funds for the down payment on a home. In many large cities, it’s more difficult to afford a home than it was in the parents’ day. A gift or even a loan would make a huge difference in this couple’s life. So, economic realities become factors, too.

While you’re making a decision, talk to us about how you can financially assist your children. We can help you make financial gifts in a tax-effective way and let you know if an early inheritance may jeopardize your retirement lifestyle or contingency fund.

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