According to a recent survey conducted on behalf of American Express, 57 percent of twenty-somethings are still relying on their parents for financial support.
No doubt the lingering economic crunch has certainly hurt many of your clients' “adult” children. But the same malaise is likely making it more difficult for the parents to comfortably offer as much monetary assistance as they once might have.
Here are some cost-effective ways moms and dads can still provide valuable aid, without giving away all of their assets.
What you can do
- Make a payment
Most younger adults who are struggling to keep up can usually be kept current on monthly mortgage, loan, and credit card payments for less than a few thousand dollars.
Making the minimum monthly payments won't reduce the debt very much, if at all. But it does buy the indebted younger ones another month to reorganize their finances and raise money for future payments without further damaging their credit scores, or, worse yet, defaulting on the loans completely.
An added bonus of not reducing the principal is that it removes the opportunity for the children to go deeper into debt.
And if your clients want some help in offering no more than “some” help to their children, you can point out that the most the clients can hand over annually is $13,000 per person, without running afoul of gift tax rules.
- Become the banker
Of course, once your clients compare how much their children are paying in interest on borrowed money to what the clients are earning on their invested money, the older folks might be tempted to eliminate the bankers' involvement, and loan enough money to the kids to pay off the traditional debts in full.
Assuming the parents are comfortable lending to their children, there are still a few hurdles families must surmount to make the loans as kosher and conflict-free as possible.
First, the parents should get the terms of the loan in writing, preferably with a payment deducted automatically and electronically from the kids' bank accounts each month.
Second, the interest rate charged needs to adhere to the “applicable federal rate” (AFR) set by the IRS, and available at www.irs.gov. The lending clients can set the loan rate lower than the AFR, but the dollar difference between what they charge and what the AFR would cost is subject to the aforementioned restrictions on annual gifts.
- Co-sign the loan
Benevolent clients with a high credit score and low level of liquidity can still assist their offspring by agreeing to co-sign for a loan the younger family members could otherwise not obtain.
At best, the loan proceeds can help the kids get a more reliable car, a better home, or an ostensibly-valuable education. And at the very least the borrowers can hopefully use the steadily-repaid loan to build up a better credit rating.
However, the potential cost of this good deed can be steep without a few ground rules. First, the co-signers should enter the arrangement expecting to eventually be responsible for the repayment of the loan, and be pleasantly surprised if that event doesn't come to fruition.
The co-signer should also coax the borrower into granting access to the loan account information and activity, as well as a regular review of the kid's credit report (free once per credit bureau per year at www.annualcreditreport.com) and FICO score (available for a small fee at www.myfico.com).
If the clients are worried the kids will continue to pile on more debt, the parents can demand that the kids contact the major credit bureaus to freeze their credit reports — and provide control over the freeze to the parents.
- Help with health insurance
If your clients' adult children are unemployed or underemployed, chances are the kids also don't have access to group health insurance, let alone the money needed to afford the premiums.
A recent change to the health care laws means your employed clients may be able to add their adult children to the employer-provided family health insurance coverage — even if the kid isn't living at home, or a “dependent” of the parents, or a student.
The adult children can qualify until they reach age 26. The opportunity to add them to the coverage depends in part on the employer's enrollment period, but there is a provision that allows the children to be added within 30 days of becoming eligible.
For more information the clients should contact their employer's benefits departments, and visit www.hhs.gov.
Even the more comfortable younger members of your clients' families might benefit from some of your time and wisdom — the aforementioned American Express survey also found that two-thirds of young adults responding would like to “increase their financial knowledge.”
For instance, a recent college grad with her first full-time job might like to bring her packet of at-work retirement savings options in to you for a review of how much she can and should contribute, and where it should go.
If the clients' children and grandchildren are still too tapped to contribute to a 401(k), you might suggest that the clients “match” contributions made to the plan, or give the kids some cash to replace payroll deductions that the younger workers put in a pre-tax plan.
You could also offer to set up a Roth IRA for the younger worker, with deposits funded by a gift from the older generation. It's perfectly legal, as long as the worker qualifies for the Roth IRA, and doesn't exceed the overall deposit limits (for 2011, it's the lesser of the kid's earnings, or $5,000).
Finally, if your clients have no desire or ability to provide financial support to their progeny, you can help keep the family peace by offering to bear the blame. When the kids approach the parents with their hands out, the clients can say, “We'd love to help you out, but our advisor says we can't afford it right now.”
Depending on the clients and the kids, the statement might not be too far from the truth.
Kevin McKinley CFP is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid A Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at www.mckinleymoney.com.