If you’ve ever helped your adult children financially, you’re not alone. Approximately 90 percent of today’s parents have done so.
Valerie RumboughParents are usually glad to help their children, because they want to see them succeed. Many times parents do so in the form of a loan – either to purchase a new home, car, or start a business. Before you make that loan, however, you may want to consider a few things.
First, are you willing to live without the money for a long time? How about forever? Anytime you loan money to someone, especially family and friends, you should be prepared to possibly not get it back. About 1 in 7 loans to family and friends are not repaid. If you secretly consider the loan as a possible gift, you won’t be as disappointed if it isn’t repaid, and a relationship may be saved. If you do get the money back, it’s a bonus to you.
Second, if you plan to lend more than $10,000 to your children, Uncle Sam expects you to charge interest. The rate you should charge is called the Applicable Federal Rate and can be found at www.irs.gov. This rate fluctuates monthly, with current rates being 1.7-4.1 percent, depending on the length of the loan. If you charge less, or nothing, the IRS will treat the foregone interest as a gift to your children and income to you. Since you will have to claim the interest as income anyway, you might as well actually receive it.
Third, you need to add structure to the loan. Set up a repayment plan with a reasonable maturity date. You may even want to draw up a simple contract that states the terms of the loan so that everyone is aware of what is expected. That way, as long as they are paying the loan back, you don’t have to wonder where they get the money to do other things, such as take a nice vacation or buy something expensive. If you have other children, you may want to let them know what you are doing so that they are not resentful about you “giving” their sibling money.
Lastly, consider whether your child really needs the money. Did they just lose their job, or do they just want to go on a great vacation? Be prepared sometimes to say “no” to your children. Giving money to a child several times in your lifetime may mean that you are actually doing more harm than good. Remember that we are all stewards of the money and other possessions that God has entrusted to us, including what we give away.