Think hard about how to help adult children financially

Virginia Illiano, who is helping her daughter financially, but that has forced her to dip into her own retirement funds, in New York, Oct. 1, 2015. Cutting the financial cord with adult children can be hard to do.
Virginia Illiano, who is helping her daughter financially, but that has forced her to dip into her own retirement funds, in New York, Oct. 1, 2015. Cutting the financial cord with adult children can be hard to do. NYT

Cutting the financial cord with adult children can be hard to do.

Just ask Virginia Illiano, a substitute teacher who lives in New York. After her daughter graduated from an expensive private college, Illiano thought her days of paying big bills for her daughter were over.

She was wrong. Her daughter, who is in her 20s, was not able to find a good-paying job and ended up moving in with her mother. That was just the beginning. Illiano co-signed for a leased car, repaid some of her daughter’s credit card debt and even paid for her nails, vacations and some clothes.

“My teacher benefits are awesome, but she won’t have any of that,” said Illiano, 55, who is divorced. And that’s just fine with Illiano.

“I told my daughter to go for her dream,” she said, explaining that she wanted her “to have her financial legs.”

Illiano’s financial leg up for her daughter, however, has a downside. She is dipping into her own retirement funds, which means she is now looking at a couple of difficult choices: working longer or selling her home, which is already being used as collateral for her daughter’s student loan.

More older parents are facing challenges like Illiano’s. They are helping out their adult children by dishing out loans or cash gifts, or paying bills. But this largess sometimes blows a big hole in their finances, even jeopardizing their retirement. As a result, some older adults are going back to work, reducing their own living expenses or even declaring bankruptcy.

Baby boomers face increasing retirement challenges of their own as traditional defined benefit pensions have been widely replaced by riskier 401(k) plans and the like, which require disciplined savings. Many have not done the comprehensive financial planning needed to factor in the greater chance that they will live longer, or accumulated enough in savings and investments to cover future health expenses.

“So they’re not looking at the long-term effects of shelling out $5,000 or so per year to adult kids,” said Jamie Hopkins, associate professor of taxation at the American College of Financial Services in Bryn Mawr, Penn. “That money could be funding an IRA contribution.”

There are clear warning signs, experts said, that parents may be giving their adult children too much money. These include taking loans from 401(k) accounts, failing to make full retirement account contributions or draining savings.

Giving some financial help can be a much-needed balm for family members. The problem is, many parents approaching or already in retirement do not know where they stand financially and how much they can afford to give without undermining their own security.

Giving gifts of money to chronically needy adult children can become expensive very quickly.

To solve a money squeeze, avoid giving away inheritances early, said Eric J. Schaefer, a certified financial planner at Evermay Wealth Management in Arlington, Virginia. Adult children often only end up coming back for more money, he explained.

Supporting more extravagant expenses like a fancy car or country club memberships should be cut off altogether, Schaefer recommended.

One-time loans, or gifts, that are used to pay for unexpected emergencies like medical expenses require little thought for parents who can afford them.

Delaying the inevitable

But going back to the money trough time and time again is dangerous. “Look at kids and ask, ‘What is the money for?’” said Robert J. Semrad in Chicago, the senior partner at DebtStoppers, a bankruptcy law firm. “Is this a solution to the problem or just a Band-Aid? Many times money given as a Band-Aid merely delays the inevitable.”

Avoid co-signing loans for cars or homes, Semrad said, since a parent’s own credit can be jeopardized. “Banks can go after co-signers,” he said. “And having assets makes you more susceptible.”

Properly drafted loans by parents to their children can teach the children valuable financial lessons, though. The keys, experts said, are to give the loans set terms and to establish a regular repayment schedule.

Peter Lazaroff, a financial adviser at Plancorp in Missouri, recommends loans that include interest rates. The loan then works just like a bond, he added, and the parent gets back principal and interest. The child should also sign a contract, which can be drafted by a lawyer. A loan that is not paid back can be deducted from an inheritance.

Experts also caution against giving a loan to an adult child who clearly cannot repay it. Family loans, they point out, are common, but being paid back is less so.

Instead of cash, parents can offer their children networking help in looking for a job and provide other forms of support. But when gifts or loans are involved, the most important thing is to be honest with yourself – and your children.

“Tough love,” said Hopkins at the American College, “requires parents to plan what they give their children. So you must have a process in place.”