Recently, I’ve been asked questions about how much a parent should gift to bail out a child who is in financial distress. This is a tough call for many retiree parents, who have accumulated some savings, but have to live off the income that those savings generate in a very low yield environment.
When an adult child cries out in financial distress, there’s that tug of war between the concern for what he or she may be facing against the worry about whether you’ll have enough to last for your own golden years. What do you tell your adult child who asks for money when they are facing a home foreclosure, or paying high medical bills or educational expenses for their own children as today’s tuition rates are sky high?
I would suggest that part of the problem lies in the very divergent ways that today’s group of retirees lived during their working and child-rearing years compared to that of today’s child-rearing generation. Without over-generalizing, my take is that today’s retirees weren’t eager to take on debt – whether to finance the purchase of a home, a car, or even educational expenses for their children.
They lived in more modest, smaller homes than do today’s generation. When I was a child growing up my family of four resided in a 1500 square foot, three bedroom, two bathroom home. My sister and I shared a bathroom, which wasn’t easy when we were both teenagers, but we somehow managed.
Today’s retirees largely drove cars that were often fully paid for, and didn’t borrow money to drive expensive luxury models. When I was growing up there were only a few luxury automobile brands – Mercedes, Cadillac and BMW come to mind – as opposed to today’s ubiquitous luxury dealerships in almost every city and town.
I don’t remember my parents carrying balances on their credit cards. In fact, they wrote checks for most things. Today we swipe our cards without thinking twice.
In fairness to today’s generation, everything seems to cost a lot more now. While federal income tax rates are arguably the same or even lower – state, county, sales and property taxes take a much larger chunk than at any time in the past. For those of us living on the Florida coast, insuring our homes from windstorm is often as expensive or more expensive than the property taxes.
But when you compound the enormous levels of debt that seem so commonplace today, it’s no wonder that when a job is lost, illness happens or some other financial setback occurs, families are much closer to the line than they were a generation ago. There doesn’t appear to be a cushion of savings that prior generations amassed for the proverbial “rainy day”.
So what does today’s retiree do when they get that call? There’s no easy answer. The first thing that I would suggest is to meet with your financial advisor to determine if you have the ability to gift any money without suffering a lifestyle change of your own – or jeopardizing your own ability to meet your expenses. If you simply don’t have the resources, you can’t say yes. Honest communication about your abilities is important.
Your adult children also may have other options available to them. When asking for large gifts when in financial distress, I would think that an adult child has an obligation to disclose the big picture. How deep in debt are they? If you make the gift to them, will the gift only postpone the inevitable? If this is the case, I would think that the children have a duty to meet with a bankruptcy attorney to review all possible courses of action.
Other avenues might be explored. Would it be more helpful for the parent to help pay for health insurance premiums or some other means of support that ultimately bridge the gap from today’s problem to a more secure future?
Finally, I urge caution when a parent believes that a loan to the adult child is the answer. Promises to pay back loved ones are often neglected, leaving hard feelings and dashed expectations. Even if you decide to loan the money, you should be in a good enough financial position that if the dollars were never repaid it would not adversely affect your future financial security.
No one enjoys being in this situation – parent and adult child alike. But when confronted with these weighty issues, good communication between everyone involved is paramount to getting through it not only financially, but emotionally.
