Giving money to family members can be uncomfortable at best, and sometimes even relationship-destroying. But it's becoming increasingly common amid a tough economy: A Charles Schwab survey found that 2 in 5 respondents expect to provide financial support to their parents at some point, and 1 in 4 anticipates needing to give money to siblings. Concerns about supporting family members were stronger among younger respondents.
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How can you give money, even as gifts during the holidays, without straining relationships with loved ones? Here are seven strategies that can help make cross-generational lending work—or not:
First, decide if you can afford to give help. An Ameriprise Financial survey found that many baby boomers didn't realize how much the help they were providing cut into their own retirement savings. About 30 percent of baby boomers said the money they gave their adult children negatively affected their own retirement savings, but most were unaware of the impact. "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.
If you can't afford it, consider saying no to any requests. Declining a request for help, while painful, is sometimes the best decision a person can make, especially since many loans are never repaid. The top priority is keeping yourself solvent, says Ted Beck, president of the National Endowment for Financial Education.
If a relative asks for money unexpectedly, you should stall, suggest Jeanne Fleming and Leonard Schwarz, authors of Isn't It Their Turn to Pick Up the Check? "What you blurt out may not be the best answer," Schwarz says. Then, be sympathetic but firm. "You want to be unequivocal. Don't say, 'This is a bad time,' or they'll ask you again next week," Fleming adds.
If you receive money, be aware of what might be expected in return. Donald Cox, professor of economics at Boston College, says people who give or lend money to relatives are usually motivated by altruism, but they may expect something in return. For example, if a parent gives money to their child for a down payment for a house or college tuition, they may expect assistance later. "Many adult children who are providing care for needy, elderly parents say they are doing this out of a sense of reciprocity," he says.
Spell out the terms of any gifts or loans. If parents decide to give their children money, Eileen and Jon Gallo, coauthors of The Financially Intelligent Parent, recommend discussing the details in advance, including whether the money comes with 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 should it 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.)
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Look for nonmonetary alternatives. Tina Kimball, a 32-year-old administrative assistant in Dayton, Ohio, loaned her parents her car when an accident left theirs unusable. If the situation worsened, she says, she would invite them to live with her family. Kimball says she wishes she could give them money, but with her own family finances under pressure, she's doing the best she can.
Put all loans and gifts in writing. Relatives lending more than $1,000 should draw up a simple document describing the terms of the loan, including the interest rate and schedule for repayment, recommends Jennifer Streaks, a financial services attorney in Washington, D.C. In addition to preventing misunderstandings, the paperwork can be important for legal reasons, too. This year, amounts over $13,000 are subject to gift taxes.
Set up a formal loan arrangement. Some online banks allow family members to loan each other money through an official relationship that includes the ability to automate monthly payments and report any late payments to credit bureaus. Nancy Flint, a semiretired dentist in Oaklyn, N.J., loaned her son, Stephen Martin, $405,000 so he could buy a home in Jersey City, N.J. She says she did so 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 about $15,000 in fees, such as private mortgage insurance and loan origination charges, which he would have faced had he gone through a bank.