Helping children is what parents do all the time. Pretty normal, that is what families are all about.
However you need to be sure they are not eroding your retirement funds excessively. After all you may be getting close to retirement or already are retired. On the other hand they can keep working for another 20 to 40 years – a lot of working life in front of them, and have time to recover from a financial upset or two without your help or money (or at least not much of it).
The number one rule is to allow / retain enough money for yourself first. If they fail to pay you back, you may not be able to go out and earn it again (especially if you are retired).
Over the years I have noticed most parents know their children pretty well and so they know who they can lend to and if it will come back or not.
However, I have seen a few tragic cases where Mum or Dad loaned a lot of money to their children, it did not come back, and left Mum or Dad very short of money indeed.
A good approach is to ask yourself, “Is it really going to help them?” If it is a relatively small amount and really does help them, then probably you should lend them the money. But what if they are on the road to business failure or, even worse, bankruptcy? That could simply be “throwing good money after bad”.
Obviously this all depends on the amount they are asking for, and in relation to how much you have in total. For the average Kiwi parents, a loan under $5,000 would be very small, a loan between $10,000 and $25,000 would be moderately significant, and over $25,000 would be a large loan.
You must ask why they need help and insist on honest answers (especially if it is a large amount). If you feel that their affairs are too complex for you, get your accountant, lawyer, financial adviser or banker to help you. If they can’t pay you back, all the while going bankrupt, they will feel bad and so will you. Your family relationship could be permanently damaged, which no one wants. Hard questions up front can go a long way to reducing possible relationship damage later on.
Not retired yet
If you are not retired, still be cautious. If you have been building up money for your retirement, well done, and to benefit from your diligent saving habits and hard work, you need to hang on to most of it.
Be very cautious – after all you cannot go out and earn the money again.
Gift or loan
If you do lend to one of your children, decide if it is a gift or a loan. All loans should be documented;
- You can document a smaller loan yourself
- If making a large loan, ask your lawyer or accountant first, as there may be some implications you have overlooked
Don’t forget about rest home fees either. If you have to go into a rest home and apply for a WINZ subsidy, they will want to know about any loans, and may want your child who received the loan from you to repay it (eventually to them).
Remember to tell your executors (the people you have appointed in your will) or your lawyer about any loans you have made to your children so they can even it all up after your death. E.g. If you have loaned one child $25,000 and none to the others, this can/ should be balanced up after you die.
While we are on this subject, if you want family harmony, tell your children you are going to leave them equal shares in your estate, regardless of who has been successful and who has not.
A will that distributes equal shares to all your children can go a long way to preventing (all too common) family squabbles in the future.