Trish Lynch, a certified credit counselor for ClearPoint Financial Solutions, says she often works with parents who overextend themselves financially when a son or daughter is in need. "Parents feel like it's their responsibility to keep on helping an adult child financially," Lynch says. "Not only does it make it financially unstable for the parent, but it creates poor habits for the adult child."
Self-preservation. When considering making loans or gifts, experts warn that parents should first protect themselves from financial distress. "It's fairly common that [we] see clients who want to start making gifts, and then, as they look into it further, they realize maybe they're not in a position to start making them," says Marianne Kayan, an estate-planning attorney in Bethesda, Md.
An Ameriprise Financial survey found that many baby boomers didn't realize how much the help they were providing was cutting into their own retirement savings. About 30 percent of baby boomers said the money they gave to their adult children negatively affected their own retirement savings, but most were unaware of the impact it was having. "People psychologically didn't get that connection...[that] 'if I weren't bailing out my kid, then I could be adequately funding my own retirement,' " says Craig Brimhall, vice president of retirement wealth strategies for Ameriprise.
As for fostering bad habits in adult children, Eileen Gallo, a psychotherapist and coauthor of The Financially Intelligent Parent, recommends that parents ask themselves if giving money makes an adult child more or less independent. Her husband and coauthor, Jon Gallo, warns that dependence can breed tension: "If you continue to have to be rescued by your parents, you start to resent your parents."
Spell it out. If parents do decide to give money, the Gallos recommend discussing the details in advance, including whether the money comes with any strings attached. For example, if money is earmarked for a car, can it be any type of car? If the money is a loan, when does it need to be repaid, and at what interest rate? (If the rate is below the one set monthly by the IRS, it may need to be treated as a gift, which can have different tax implications. Each parent is allowed to give a child up to $12,000 a year before it is subject to gift tax.)
New companies, such as Virgin Money (formerly CircleLending), allow family members as well as friends to lend each other money through a more formal arrangement, which includes automatic monthly payments and deposits.
Nancy Flint, a semiretired dentist in Oaklyn, N.J., chose to lend her son, Stephen Martin, $405,000 so he could buy a home in Jersey City, N.J. She says she did it to help him as well as diversify her investments. She receives $2,500 a month in payments on the loan, which carries a 6 percent interest rate.
Martin, a technology consultant, also benefited: He estimates that he avoided around $15,000 in fees, such as private mortgage insurance and loan origination charges, which he would have faced had he gone through a bank.
Parents may want to consider the example they're setting. Frank Furstenberg, professor of sociology at the University of Pennsylvania, says young adults today may watch their parents providing so much support for so long—and be wary of becoming parents themselves. And that, of course, would be very bad news for boomers who aspire to become grandparents.