Scenario One: The parents and their children went into a joint venture and bought a rental house in Auckland. They didn’t borrow too much, were patient, and came out well. Had they done so in towns like Kaitaia or Wanganui, they would still be waiting.
Scenario Two: Dad, retired, borrowed against his house and loaned his son a big sum to set up a new venture that “couldn’t miss”. But it did, and dad lost his house. Rose coloured glasses was the main cause of this sad case.
Time and work
These two factors need to be considered carefully. If you are close to retirement or already retired, your income will most likely change. However your children will be able to work for another 20 to 40 years, hence they have time to recover from a financial upset or two without your help or money (or at least not much of it).
You can get caught out
A very nice lady I know bailed one child out from near bankruptcy, which cost her a lot. Not long later her other child got cancer and needed a lot of help. Of course mum helped, but it sorely stretched her finances.
Are they facing bankruptcy?
This is a tricky one as you might be simply “throwing good money after bad”. Maybe it is better to let them go under, and then help them get started again.
If in doubt, do half
A really good rule of thumb - if in doubt, lend them half.
You can apply this to many financial situations too. If your daughter wants a slap up wedding in Hawaii, offer to pay half. That will save you money, and help balance her thinking too.
Think like a bank
Ask them why they need help. Can they pay you back? What is your money secured over? Nothing? A depreciating car? A house?
If they can’t pay you back, they will feel bad and so will you. Hard questions up front can go a long way to reducing family relationship damage later on.
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. If you’re making a smaller loan, you can do this yourself. If making a large loan, ask your lawyer or accountant first, as there may be some implications you have overlooked.
Rest home fees
Don’t forget about rest home fees. 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).
Tell your children you are going to leave them equal shares in your estate, regardless of who has been successful and who has not. This can go a long way to preventing all too common family squabbles in the future.
Remember to tell your executors or your lawyer about any loans you have made to your children, so they can even it all up after you are gone.
It’s easy to work out. You have three children - Jane, Jess and Jimmy - and your estate is worth $600,000. However, you have loaned Jimmy $60,000 so your total estate is $660,000. This amount divided by 3 = $220,000 each. Jimmy owes you $60,000 so he gets $220,000 minus $60,000. Jane and Jess get $220,000 each and Jimmy gets $160,000 - all very fair.
Well it should be, but I’ve seen some children, like Jimmy, get quite grumpy.
Your money, not theirs
Teach them they don’t have a right to your money. You worked for many years and earned it, and so can they. Hopefully they will get that message and then when you do lend or gift them some money, they will have your money in the right perspective.
Emotional vs hard decision
It is complex because it involves love and affection, and we don’t like to see our children (and grandchildren) suffer.
If you are finding the decision too tough, ask your financial adviser, bank manager, lawyer or accountant. Most of them will be parents too, and will usually understand.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge