More and more these days, retired clients want to provide
financial help to an adult child in his or her 30s, 40s or 50s. That child may
have lost a job during the recession, gotten divorced or need help paying for a
child’s college education. The problem is, the parents are often in a somewhat
precarious financial situation themselves, and every dollar they give away to a
child puts them at risk of depleting their retirement savings.
It is crucial for the clients to preserve assets. They need
to understand they did a good job raising their children, but that they have to
be a bit selfish now because they might live to be 90 or older and they’re
going to need the money. But often clients are determined to help their family.
One creative solution is for the parents to make a loan that
serves as an advance on the child’s inheritance. Even though it’s a loan, the
chances are the client is never going to see that money again.
The child signs a promissory note with a low rate of
interest, and the note is due to the parents in 30 years or upon the death of
the second parent, when the estate settles. Parents like this arrangement
because it’s a way to give one child some money while treating all children
equally in the estate. The estate split can still be equal, and the loan for
the needy child gets repaid back to the parents’ estate from the child’s
inheritance. The children like this approach because the money is a loan, not a
handout.
Another approach is for the parents to guarantee a bank loan
instead of lending the money directly. This can be useful for the parents
because it doesn’t deplete their assets. But it requires more documentation,
and the banks typically won’t offer a personal loan like this for a term longer
than 10 years.
Clients who gift the maximum amount that is exempted from
federal taxes to a child in dire straits. But it’s crucial to emphasize to the
child that this is a one-time deal. Otherwise, the child will get used to
riding the gravy train—and most parents can’t afford that.
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