Withdrawals and deposits at Bank of Mom and Dad

Accountant Mark Goodfield (aka The Blunt Bean Counter) advises anyone considering granting a request for money to a child or parent to review the issue with their accountant and/or their financial planner—and maybe their lawyer too. They have the ability to be detached and provide objective advice.

Bank_Of_Mom_and_DadProbably one of the most frowned upon money taboos is asking a family member for money, whether as a loan or a gift. This can be a child asking a parent for money or, surprising to some, a parent asking a child for money. This taboo can encompass everything from a child in an abusive marriage who is dependent upon the abusive spouse’s income and thus cannot leave the marriage, to a parent too proud to admit they do not have the necessary funds for retirement and are reverse mortgaging their house to survive.

Broaching the money taboo by the party in need requires a leap of faith that their family will not judge their current financial or living situation, and not consider the request a money grab.

I have broken down this taboo into three categories:

1. Need
2. Seed
3. Greed

Need—Help! I need a hand

Some examples of need-based requests by a child are as follows:

a) They are in a bad and/or abusive marriage and need money to get out of the marriage;
b) They need money to help buy a home;
c) They lost their job.

Parents may ask their children for money for the following reasons:

a) Medical issues;
b) Elder abuse by another child or another individual;
c) Poor retirement planning;
d) Poor fiscal environment.

One of the hardest decisions a parent will have to make is whether to give or lend money to a child that is in true need of the money. These are factual requests in which the need for money can be substantiated. These requests leave no question that the money has a direct intended use and will not be used for personal gratification or discretionary purchases.

The weight of one of these requests is often compounded by the fact emotional issues are attached to your child’s request for money. In the end, the decision to provide financial assistance must be determined in large part by a cold, hard analysis of your financial situation and your financial wherewithal to provide assistance, especially where the request could jeopardize your retirement. I discuss this in further detail below.

Requests by parents (or more likely, non-requests, but you discover a need) tend to be more readily accepted. This is just simply because the person is your parent and typically you will want to repay them for everything they have done for you. But as with a child, you still need to consider your financial position before making any emotional decision.

Seed—Psst, I have a great idea

Some examples where a child’s request for money is seed based are the following:

a) They require money to start a business;
b) They require money to expand an ongoing business;
c) They require money to go back to school to upgrade their education.

Requests for seed money can carry significant risk. Often money advanced or loaned for a seed-money request cannot be repaid. These requests can create significant internal turmoil for parents. Many parents have always told their children to think for themselves and to reach the stars. When a child wants seed money, it often revolves around the child starting a new venture or investing in a business. These requests are often gut wrenching for the parent, as they struggle with whether they a) can afford to lend or give money to their child; b) often the parent has preached initiative and grabbing the brass ring when the chance presents itself; now they may be the roadblock to following through on that initiative; and finally c) parents are often aware many business start-ups go bankrupt, so practically it is a huge risk to lend or give seed money for a new business.

Greed—I am a money leech, I admit it

Examples of where a child’s request for money is greed-based are the following:

a) Need money for a vacation;
b) Need money for personal vanity (such as cosmetic surgery); or
c) Need money for a discretionary purchase such as a large screen TV or car.

Objective parents often reject requests for greed money, but many parents will do anything for their kids, even if it is detrimental to their financial future, and even it is for non-necessities. Many of these greed requests fuel the notion that some children just see their parents as a bank. Many of these same children are often characterized as the type of children that will hover over your body waiting for you to die. While this view is extreme, it is not without basis in fact. We all have observed children who have had fractured or little or no relationships with their parents over the years, and who suddenly arrive on the scene asking for money or when their parents take ill.

Separating emotion from finance

The decision to acquiesce to a request for money from a child or a parent needs to be analyzed as a purely financial decision. Can you afford the financial request or not?

Where it is determined you have the financial wherewithal to grant a request for money, you must then make an emotional decision as to whether you feel the request is warranted, or of such an urgent nature you need to seriously consider granting the request. Where you have the financial ability to provide funds, the decision can easily be rationalized as an early inheritance or money you can afford to lose. The issue in these cases is often more philosophical: Do you make the child stand on their own or assist them?

The more typical and gut-wrenching cases are where it is determined you do not have the financial wherewithal and you must decide if you are you willing to jeopardize your retirement to assist a child financially.

Let me speak to my accountant and financial planner

Any parent or child considering granting a request for money to a child or parent needs to review the issue with their accountant and/or their financial planner or engage such. Your accountant or financial planner has the ability to be detached and provide objective advice from both a financial perspective and emotional perspective.

For some people, money is never the issue. But for most, it is a significant issue, even where you have saved enough for retirement. Your accountant or financial planner can run several financial scenarios that will consider the impact of making a loan/gift on your retirement funding and allow you to review the financial consequences of advancing ‘love’ money (assuming you will never see it back). For many people, the answer will never be entirely clear from a financial perspective, as the elephant in the room is always longevity. It is difficult enough to plan for retirement when you don’t know how long you will live, but that decision is further complicated when you must reduce your retirement nest egg for an unexpected cash request from a child or parent. However, at minimum you need to review the impact of making any significant gift upon different retirement scenarios.

Surprisingly, the few times where I have been involved in these type situations, my financial expertise is not the only thing that is of value. Also valuable is the fact I can relay my experience in other similar situations. As I am not emotionally attached, I can coldly state on a no-names basis what I have that observed in other similar family situations.

You mean I must speak to my lawyer also?

If it is not bad enough I have already told you to pay an accountant and/or financial planner for objective advice, you likely will also need to spend more money to amend your will to account for the gift or loan. Your lawyer may do this via a Hotchpot clause, or a simple promissory note.

The tugging at my heart (purse) strings is too much

Some people will realize, after meeting with their accountant or financial planner, that they cannot afford to assist their child or parent. They often feel guilty and/or sad they cannot assist; or in some cases dejected they did not achieve a greater level of financial success such that they could assist their child or parent. But, for financial reasons, the discussion ends, as it is clear they cannot afford to assist their child or parent.

Yet, over the years, I have seen several parents assist a child financially when they cannot afford to do so. I call this the ‘blood is thicker than water’ scenario. These parents cannot stand to see their child suffer financially or health wise, and despite the objections of their accountants, friends, family, etc. make the gift or loan. There is not much you can do or say in these circumstances, except to try and help assist the child or parent to reduce costs where plausible and to review if there are any ways to make up for the loss of retirement funds. In the end, their child or parent’s well being far outweighs their concern for their own financial well being.

This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.

This is an edited version of an article that was originally published for subscribers in the July 2018, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.

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