Helping Adult Children Financially – Creative Ways to Help

In this blog series, we’ve covered many ways to help adult children financially, including education, childcare, housing, and retirement. In this final post of the series, we’ll cover some other areas that can also be used to help:

• Investment Accounts
• Life Insurance and Annuities
• Real Estate
• Starting a Business

Investment Accounts

Consider the old proverb, “If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.” This can be applied to parents who don’t want to simply hand over money to their adult children. Instead, they teach their offspring how to invest wisely, empowering them to increase their wealth over the long term.

Here are some classic investment pointers parents can pass along.

Think Long Term

Sometimes, it’s difficult for young people to envision far-off future events like retirement. Yet, it’s critical to set aside funds today for a better tomorrow.

Start Early

The sooner one starts accumulating funds, the longer time they have to grow, which increases the chances of reaching future financial goals.

Create a Financial Plan

The best approach to reaching future financial security is creating a plan that defines goals and lays out the steps to reach them. Since few people have the knowledge or experience to craft a comprehensive financial plan, retaining the services of a qualified financial planner will increase the probability of success.

Manage Risk

Even with a financial plan, no one can be 100% certain that financial goals will be achieved, so reducing risk is essential. For example, financial diversification is a time-tested risk reduction strategy which involves spreading financial assets across various savings and investment vehicles with the assumption that when one is down, another will be up, thereby reducing overall risk of loss.

Factor in Tax Impacts

Rookie investors must learn how to assess the effect of taxes on their savings and investment returns. Consulting a tax expert will be worth the expense because tax calculations are complicated and mistakes can be costly.

Parents may “seed” their child’s investment account with a financial contribution. From this starting place, the novice investor has more options. However, even without such a contribution, passing along the knowledge from a lifetime of money-related successes and failures can provide invaluable guidance.

Life Insurance and Annuities

A traditional way parents help their child financially is to purchase life insurance or an annuity. (Grandparents can do this for grandchildren, also.) This can be done whether the child has reached adulthood or not.

Life Insurance

For life insurance, there are two common approaches.

First, the child is the policy’s designated beneficiary, thereby receiving a death benefit when the insured (parent or grandparent) dies. Payouts from life insurance policies are generally tax-free, so some parents see this as an efficient way to pass wealth down to their children.

Second, a life insurance policy can be opened with the child as the insured. Most gifted life insurance is whole life because such a policy has the advantage of providing both a death benefit and a way to accumulate money.

Annuities

Annuities are contracts that guarantee a lifelong income flow in exchange for payments made into the contract. A deferred annuity makes the most sense when a parent buys an annuity for a child (or a grandparent for a grandchild) because payments to the annuitant (child or grandchild) start at a specified age.

Life insurance and annuities can be great ways to help adult and minor children financially. However, both come with high fees, are often inflexible contractually, and are only as safe as the companies that offer them. Buyers must be aware of all the pluses and minuses before committing to either of these financial products.

Real Estate

Gifting real estate to an adult child is another way to provide financial assistance. A classic example is when mom and dad downsize and then either gift the family home to the adult child or sell it to them at a deep discount.

• In the gifting scenario, the adult child recipient pays no taxes on the gift until the property is sold. However, the parents will probably need to file a gift tax reporting form with the IRS.
• If the parents sell real estate to their adult child at a discount, the parents can take a tax write-off on the difference between the assessed value and the sale price.

There are other options, like adding an adult child to the deed, but whatever the approach, it is essential to retain a real estate attorney to help craft the deal. This will prevent unforeseen legal or tax effects that could turn a well-intentioned act of generosity into a massive headache.

Starting a Business

Parents may be thrilled that their adult child has the vision and drive to start a business. On the other hand, they may have a big decision to make when their daughter or son asks for financial help in getting the new venture off the ground.

Parents need to answer some essential questions at this point:

• Is this something to get involved in? What will be the consequences of helping? Is the venture something you believe in, apart from the love you feel for their adult child? If you don’t help financially, will that cause hard feelings? These are emotional decisions that need to be sorted out first.
• What are practical considerations? Parents should request a business plan and be prepared to ask hard questions. If the plan (or lack thereof) raises concerns, you owe it to yourselves and your adult child to have a frank discussion about any deficiencies.
• Can we afford this? Even if you have confidence that the venture has potential, is the money there? Think carefully about your own financial health before taking a flyer on the new business.

Given this and other steps in setting up a new business, parents should insist on involving an attorney experienced in these matters. No matter what the form of financial support, having legally binding documentation will provide clarification for all parties and (hopefully) reduce the prospect of conflicts as things progress.

Let’s Have a Conversation:

In what ways have you helped your children financially? What do you not feel comfortable helping with?