Broker Check

Should Parents Provide Financial Support to Adult Children?

by Howard Hook, CFP®, CPA

As quoted in ConsumerAffairs, March 17, 2014

Ever since a Pew Research Center report found a growing number of parents – 48% – had provided financial assistance to an adult child within the previous 12 months, financial planners have almost universally expressed alarm.

The parents, the argument goes, need to be planning for their retirement, not giving money to children who, at this point, should be living on their own. It’s worse, they say, when parents who have already retired are writing the checks.

But Howard Hook, a CPA and certified financial planner with EKS Associates in Princeton, N.J., thinks the stereotype of the mooching offspring taking advantage of an aging parent tends to be overblown. Each situation is different, he says, and parents have to use their best judgment in deciding whether or not to provide a financial helping hand. Sometimes it can be the right thing to do.

“I think clearly a case can be made that helping someone at a younger age, to get them through a rough patch, many times is better than leaving them an inheritance when they are in middle age or later,” Hook told ConsumerAffairs.

Get on the Same Page

The key, he says is for both parents and child to have a clear understanding of what is being offered. Is it a loan or a gift?

Other questions that need to be asked and answered are what effect will the aid have on the parents’ financial condition? If it is a loan, what expectations are there of getting repaid? What does it mean if you don’t get repaid – is that going to affect your relationship with your child? If you have more than one child how does it affect the other children in the family who see Mom and Dad lending money to a sibling? That last question is often overlooked.

“The family dynamic can get thrown up in the air,” Hook said.

Two Possible Outcomes

Hook concedes the whole issue is highly emotional. Parents usually feel protective of their children and hope to make a difference in their lives. But he says it’s important to realize that there are two possible outcomes.

“The good outcome is the child being able to say, ‘When things were tough I had someone who was able to help me out and assist me financially. I didn’t take advantage and it got me over the hump,’” Hook said. “Where it goes bad is when you have a child who continues to need to borrow, isn’t responsible enough to pay it back or takes advantage of a parent’s emotional feelings.”

There may be more children asking parents for support in the wake of the Great Recession. The country has not fully recovered and the job market only now seems to be tentatively recovering. The financial need – whether perceived or real – seems to be greater now.

“Some of these young people are unable to get jobs,” Hook said. “They’re also coming out of college with huge student loan debt that puts a huge financial burden on someone at a very young age.”

Written Agreement

If the money is being offered as a gift, there should be a clear understanding of what the money is to be used for. The same is true when the money is extended as a loan. But in the case of a loan, Hook recommends parents and child formalize the process with a written agreement that clearly states the terms.

“What that does is make it real to everybody,” Hook said. “By making it real, at a minimum, it gives everyone a sense of responsibility.”

In his practice Hook says he often sees the other side of the coin – parents who have been asked for help but who refuse, usually he says, out of a fear that they will run out of money in retirement. Hook says in those cases as well, parents should understand that every situation is different.

“If someone wants to loan money to their children and can financially afford it I would never suggest they shouldn’t do it,” he said. “We may lay out the pros and cons but ultimately it’s their decision.”