Dear Carrie, Several years ago, I loaned my then 24-year-old son money to buy a car on the condition that he pay it back in monthly installments. Because of some job problems, he wasn’t able to keep up with the payments. Now he’s back on his feet and wants to start paying me again. While I’m happy he’s being responsible, I’m hesitant to take his money. I’m more financially secure than he is, and I know there are lots of things he needs to save for. On the other hand, I don’t want to lessen his sense of responsibility or independence. Any ideas on how to handle this?
Dear Reader, This is a great question because so many parents of young adults are faced with a similar dilemma. As you watch your kids struggle financially, of course you want to help. To me, that’s what families are for. And once your kids are grounded and feel confident that they can take care of themselves, it’s a pleasure to help them — and can make a big difference in their lives and the lives of their own families. However, how you give the help is important.
I applaud you for offering to loan your son the money for his car, not just making it a gift. Paying for a car over time provides important financial lessons, involving saving, budgeting and working towards a specific goal. Now that your son is in a better financial position and wants to pay you back, he obviously appreciates those lessons. And, as you imply, it’s important not to do anything to take away his drive.
On the other hand, as a mother, I completely understand your desire to continue to help him. So first, let’s talk about how you might handle the payments. Then we’ll explore other positive ways to give financial help.
Be creative about a repayment plan
Since you’re uncomfortable accepting payments because your son needs the money more than you do, there are a couple ways to handle this that could work for both of you.
One idea is to set a monthly payment your son could easily afford. Accept the payments, but put half aside to help him again when he needs it. You don’t even have to tell him you’re doing this. He’ll feel the pride and confidence that comes with making good on a debt. And you’ll know that you’re actually using that money for his future benefit.
Another possibility is to strike a deal where your son divides his payment into two parts: half to you and half into his savings account or IRA. That way, he’ll be encouraged to pay his debts as well as save for his future.
By accepting some sort of payment, you’re acknowledging your son’s financial responsibility and encouraging his good habits. Refusing to accept payment might actually undermine both.
Look for other ways to help that foster growth and independence
Even if you’re in a position to help grown kids financially, I think it’s important to be selective and not just write a check. Ideally, you want to offer help that reflects your values and can have a positive impact both today and down the road. Here are three areas to consider:
—Insurance and health care costs: If a young adult doesn’t have health insurance, consider paying initial premiums on a high deductible policy. You’ll not only be helping with the monthly bills, you’ll be emphasizing the importance of having adequate coverage. Even with a high deductible policy, there still may be periodic medical expenses that need to be covered. You could offer to pick these up for a specified time period. If you make a direct payment to a healthcare provider or hospital on behalf of another person, there’s no gift tax.
—Education, both for kids and grandkids: Whether it’s an advanced degree or the need for new job skills, education is expensive. Would you be willing to cover these costs? What about paying for daycare or pre-school for the grandkids?
—Keeping a roof over their heads: Coming up with move-in costs such as first and last month’s rent plus deposit is a struggle for many young adults just getting started. Covering these costs can be an excellent opportunity to help get a young person get off the ground. When it comes to buying a first house, helping with a down payment is a positive way to offer support, whether as a gift or a loan.
Make a gift as part of estate planning
If reducing your taxable estate during your lifetime makes sense, you can gift up to $14,000 a year to an individual without incurring gift taxes ($28,000 for a married couple splitting gifts.) You might also consider gifting larger amounts to a 529 College Savings Plan—an excellent opportunity for grandparents to make a significant, targeted contribution.
There are many reasons why grown kids might need financial help — after all we live in a very expensive world — so if you can help, by all means, do it. To me, it’s an investment in the next generation. Just make sure you’re comfortable with what you’re giving and that your kids know what’s expected in return.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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