The Bank of Mum and Dad

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It’s every parent’s dream to see their children succeed in life and sometimes that means helping them along the way. But how much help should children get? They need enough to give them a good start, but not so much that they become dependent on parents to get by.

People with adult children will tell you that children are a lifetime financial commitment. That’s because life never goes smoothly, and every now and then, for a variety of reasons, Mum and Dad get called upon for a bit of help.

Parents are most commonly called upon for help with:

  1. The cost of tertiary study – fees, living costs or paying off a student loan
  2. The cost of setting up a flat for the first time
  3. Paying off unmanageable short-term debt, for example when credit cards get out of control
  4. The deposit on a first home
  5. Assistance when grandchildren first arrive
  6. Assistance when a relationship breaks down
  7. The effects of mental health issues or addiction to drugs, alcohol or gambling

Some parents help their children by setting aside money in an investment account with the aim of making that money available to them when they leave home.

So what is the best approach to helping your children?

Helping your children with the costs of further education makes sense only to the extent that interest free student loans do not cover the costs. From a financial point of view, it is better to contribute to the deposit on their first home than to pay off interest free debt.

Setting aside money to invest for your children’s future is not necessarily the best use of money if you still have a mortgage. Instead, concentrate on reducing your mortgage as quickly as possible so you are in the best position to help your kids financially at the time when they most need it. This is likely to be when they themselves have young families.

The best way to help kids financially is to help them buy a house. A cash gift is one way to do this, and the lender will usually insist that it is a gift that cannot be repaid until the house is sold. Otherwise, parents can become guarantors for their children’s mortgages. This might mean putting their own home or other assets up as security for the mortgage, or becoming a co-borrower. The guarantors will need to provide financial information to the lender. It is essential to get legal advice before any arrangement is set up.

It would be a cold-hearted parent who didn’t help their adult child in time of need. On the other hand, children should not expect their parents to help them out every time something goes wrong. There are some basic principles that should be followed when giving financial assistance to adult children:

Take care of your own needs first

Some parents say they would give the shirt off their back to help their children. That’s a very generous approach but it creates another problem. Parents who give too much to their children can jeopardise their own financial future, especially their retirement, and then become reliant on other family members or social welfare handouts to survive. Take care of your own basic necessities, including setting aside enough for long term needs, before you help others.

Encourage your children to take responsibility

Baling out your children every time they need help doesn’t help them become self-sufficient. People learn by experiencing the consequences of the decisions they make, whether good or bad. Of course, if there are health issues involved, it is a different story. The aim should be for children to be as self-sufficient as they are capable of being.

Take precautions with large gifts of money

If your adult children are in a relationship, be careful about giving a large sum of money, as it may become relationship property and be shared with your child’s partner if the relationship ends. It is perhaps safer to lend, rather than give, large amounts. A loan should be repayable on demand and recorded in a signed legal document. Keep in mind that favouring one child in a family with financial support can lead to sibling rivalry during your lifetime or when you die. Always get good legal advice when gifting or lending large sums.

Don’t take uncalculated risks

Sometimes an adult child may ask you to guarantee a loan or offer your home or other assets as security for a loan. Always get expert advice before entering into any such arrangement so you can fully understand the risks involved and assess whether you have sufficient financial resources to withstand any loss that might arise.

Plan your estate

Your will can be written to take into account extra financial support given to a child during your lifetime, and this may help minimise family conflicts. For children who have ongoing and significant problems with managing money, particularly if there are mental health issues involved, consider setting up a trust through your will. The trustees can then ensure funds are used appropriately for the benefit of your child and/or grandchildren.

Always keep in mind that one of the greatest gifts you can give children is the ability to manage their money effectively and to become financially independent.

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