In our practice, we are often asked if clients should help their adult children or grandchildren financially. Putting aside cultural, religious or family traditions, as financial advisors our job is to ask the right questions. Most of the time, parents and grandparents who can help, do. Maybe you’ve had a successful career and are looking for a way to “give back” and help a struggling family member get started. Maybe you feel obligated to give. Whatever the situation, taking a look at your motivations, means and method are in order.
Ask:
Why do I want to do this?
Is this optional?
Is this of my own volition or am I feeling “guilted” into helping?
Am I expected repayment and if so, on what terms?
Am I ok if the loan isn’t met?
How will this affect our relationship with them and other family members?
As you can see, the list of questions is extensive and can be never-ending. If you find yourself considering loaning money to help an adult child or grandchild, know you aren’t alone. According to Savings.com, 45% of parents still cover costs for their adult children, providing an average of $1,400 a month to them. Groceries, cell phones, and rent/mortgage are parents' most common spending categories[1].
However, car and health insurance and even subscriptions like Netflix or Uber are additional expenses parents may cover, and they all add up at the end of the month. The same Savings.com survey also revealed half of the parents of Gen-Z adults paid for vacations - with other expenses like credit cards, student loans, or investments rounding out the list of costs parents are covering.
The need is growing too – Covid put a pause on many kids’ careers and they moved home out of need or to be closer to loved ones. In fact, Forbes reports nearly a third (32%) of Millennials and Gen Zers moved back home with their parents during the pandemic, and most still live there. Two-thirds of young adults who moved back home remain with their parents. Slightly more than half (51%) of those who moved home say it was out of necessity.[2]
Conversely, many of us are also helping adult parents. According to US Census.gov, roughly 4.3 million U.S. adults provided voluntary financial support to parents in 2020 — almost as many as the 4.4 million who made mandatory child support payments).
Luckily, there are a few things you can do to help your kids that will also help you. When Congress passed the Tax Cuts and Jobs Act (TCJA), it included some significant tax saving benefits. MarketWatch outlined the benefits in an article after the legislation stating: if you are part of an LLC or sole proprietorship, you can hire your under-age-18 child (as a legitimate employee) and his or her wages will be exempt from Social Security tax, Medicare tax, and federal unemployment (FUTA) tax. In fact, the FUTA tax exemption lasts until your employee-child reaches age 21. You can hire your child part-time, full-time, or whatever works for you and the kid.
As part of the legislation, the standard deduction increased from $6,300 to $12,550 starting in 2018. This means your child can shelter almost twice as much wage income with the increased standard deduction, according to MarketWatch. And your kids can open a Roth IRA and start contributing regardless of age, but they must have earned income that equals at least what they contributed that year, up to $6,500.[3]
In the end, the decision to help an adult child financially is a complicated decision with many factors to consider. If you decide to do it, remember you are in control of the agreement. You may want to ask them to take financial literacy classes, agree to a payment plan and/or accept responsibility for future costs. The end goal is to instill financially independent children and some may need a little help along the way. But it’s up to you to decide how much to help and for how long.
Feel free to contact us at Maxwell Financial or visit our website at https://www.maxwellfm.com/ for advice and support.
[1] https://www.savings.com/insights/financial-support-for-adult-children-study
[2] https://www.forbes.com/sites/brendarichardson/2022/08/30/many-young-adults-who-moved-back-home-during-the-pandemic-still-live-there/?sh=5cdbef3b74de
[3] https://www.nerdwallet.com/article/investing/roth-ira-contribution-limits