Tuesday, March 4, 2014

Giving money to your adult kids: When and how

"The easiest way for your children to learn about money is for you not to have any."
 --- Katharine Whitehorn, British journalist, writer and columnist

It may be OK to give your  12-year-old kid $10 to play video games at the arcade but is it a good idea to give $10,000 to a grown child who is just not making it?
Baby boomer parents – especially women – are guilty of forming co-dependent relationships with their adult children. The bad news is that generous gifting may affect their own ability to retire.
A recent study from Merrill Lynch Wealth Management shows that in the last five years, three out of five (62 percent) of Americans age 50 and older have provided financial help to family members…adult children, parents, grandchildren, other relatives. Generosity runs deep in our culture. The survey queried 5,500 baby boomers age 47 to 67 in mid-2013.
The average financial assistance during the prior five years was a hefty $15,000.
The money may have helped a relative with a one-time need or it could have been ongoing assistance over the course of many years.
The bad news? The vast majority (88 percent) of people 50 and older who have handed out this money had not factored in how the gift may affect their own ability to retire. And there was a “dangerous” absence of discussion about the gift among family members, said the survey analysts. Click here for the "Family & Retirement: The Elephant in the Room" full report.
Retirement fact: Every dollar that goes into a retirement savings fund such as an Individual Retirement Account or a 401(k) earns reinvested money tax-free until you retire. It’s the only real way to save enough.
 Give it to your kids – the money is gone and you may come up short at age 66 or 67.
“Given the challenging economic climate during the past several years, it’s not surprising that so many Americans have extended financial support to their loved ones,” said Andy Sieg, head of Global Wealth and Retirement Solutions for Bank of America Merrill Lynch. “However, such admirable willingness to assist family members should not place one’s own long-term financial security in jeopardy, and can be a hidden risk to retirement that must be considered and planned for.”
Before parting with your hard-earned money, have an open discussion with all family members. It may feel right to help the kids but that giving may come back and bite everyone when it’s time for you to retire. It won’t just be your problem, it also may be theirs. Ground rules and boundaries should be discussed. Your own longer life-expectancy could be a big factor in how much you save for retirement.
The Wall Street Journal regularly reports on retirement issues. Recently Veronica Dagher wrote about the "Dangers of Giving Your Home to Your Children." (Click here.) Among those dangers are that your kids will decide to sell the house and evict you in order to do so. Or creditors come after the house if a child defaults on a loan or loses a legal dispute.
The best ways to give
So how can we best help our low-earning adult children? Here are a few tips from Merrill Lynch investment advisers:
- Pretend you’re running a family 401(k) and set up a plan to match the savings that your kids do. That way they have skin in the game.
- Pay for a training course or help with grad school or pay for childcare so they can build a career. That way they have goals for getting ahead.
- If you own appreciated stocks or a mutual fund outside of a retirement plan….give your low-earning kids shares as a gift. The child can sell the shares without the capital gains tax consequences that you might face. As with all tax moves such as this, consult your own tax accountant or financial adviser before taking this action.
- Make contributions to their Roth IRA accounts.
- Bypass the kids altogether and put money into a 529 account to help pay for the education of a grandchild.
- If you can’t afford to hand out money, offer non-financial aid: Baby sit, help with home repairs, or cooking so they can work.
Or you can do the math on your own retirement needs and just say NO.
10 Best Ways to Give Your Heirs Money While You're Alive, Forbes, click here.
Seniors Giving Money to Adult Children: What's Wrong with this Picture?, click here.
Should you provide a Financial Bailout for Your Adult Children? click here.

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