Parents usually consider whether they should lend money to their adult kids, and in most cases, the appropriate advice is… don’t. This sounds harsh, but it’s actually a precaution.
How many times have you heard family or close friends lose their savings or have their own finances suffer when they acted as a bank. Not just that, relationships can turn sour and families can be torn apart because of money.
But despite that, there’s no denying the Bank of Mum and Dad is one of the biggest lenders and will be around for a long time. After all, parents want to do their best for their children. However, you need to be aware of and understand the risks that come with it.
Here are some tips to ensure you are protected when you offer funding assistance to your adult kids.
Lend money to your adult kids with a formal agreement
If you’ve taken a part as a bank, then act as one. To lend money, it should be treated as a business transaction and executed with a formal agreement between parties, indicating the terms of the loan, including repayment schedule.
Have a lawyer draft this agreement to help avoid potential risks and show that you’re serious. It can also make sure the money stays in the family if your adult kid’s relationship ends.
If a late repayment occurs, the best thing to do is to communicate. Deal with it right away and don’t let the situation become awkward.
Gift your adult kids money
Some parents prefer to gift money to their adult kids. While gifts are usually tax-free, if tax has already been paid on the money, there could be risks.
For instance, if your kid is married or in a live-in relationship and it ends, gifts will be treated as part of the family asset and will be divided up in court. On the contrary, to lend money is a legal liability for your adult kids and will make sure your money doesn’t leave the family unexpectedly.
Being a guarantor
Acting as a guarantor seems simple. However, if something goes awry and your kid defaults, it’s your hard cash on the line. So it’s important to pause and think hard before being a guarantor. It’s better to limit the liability to a fixed amount that you can manage to repay. Remember, unlimited guarantee means unlimited risk.
Teach your adult kids about debt
It’s hard as a parent to see your adult kids experience financial stress. But they are adults after all, and should be able to take care of themselves.
Instead of digging them out of a hole, sit your kids down and teach them how to budget and do debt consolidation. Or perhaps recommend them to a financial adviser.
Help them start a business
It’s most likely that if your children start a business, they will ask you to invest in it. If it’s something you’re interested in being a part of, think about your role as a regular investor.
Ask for a business plan. Make suggestions or give your opinion on areas for improvement. Be clear about what you’ll get in return when the business takes off.
Don’t give the entire amount either. Tell them to save and come back when they have the money for their startup. Maybe give them a small amount to get things going, then add to it whenever there’s specific business milestones.
Act as the Bank of Mum and Dad with the ASAG Reverse Mortgage
Our team at ASAG supports our customers who are about to transition to retirement or already in retirement by offering our equity release solutions to help boost finances. One in particular is our reverse mortgage.
The ASAG Reverse Mortgage allows our customers to act as the Bank of Mum and Dad to their family when they need it most. We find parents and grandparents wanting to assist their family financially, either to pay for educational expenses, a home deposit, or a mortgage. Our reverse mortgage gives them the opportunity to do this without accessing their long-term retirement savings or superannuation.
We’re happy to assist with more details about how the ASAG Reverse Mortgage works. Our lines are open on 1300 002 724 and at firstname.lastname@example.org, so feel free to call us or send your enquiries about our equity release solutions.
You can also get started by using our tool below to assess your available equity.