Adult Children: Cutting the Cord

How much financial assistance should you provide adult children and for how long?  I’ve had over forty years of observing parents, both wealthy and not, provide various levels of financial support for their children.  First, I must confess, I have no children of my own, so my ‘experience’ comes strictly from my observations and the resulting effects on the children.

“If you toss your children a financial lifeline, they will grab hold tightly and will not let go until you cut the cord.”

My first observation is probably not surprising.  If you toss a child a financial lifeline, he or she will grab hold tightly and won’t let go until you cut the line.  This becomes most evident where clients make annual gifts to children, often under the advice of financial advisors for the purpose of reducing potential death taxes.  Current law allows you to give up to $15,000 per year to as many people as you choose.  A gift above that amount requires you to either pay a ‘gift tax’ or use a portion of your ‘lifetime gift exclusion’.  These gifts are typically done in December and the first year of the gift, I find the children are very appreciative.  However, after several years of gifts, my observation is that not only are the children now expecting the gift, in many cases, they have already spent the money…and in many cases, unwisely.  Solution:  In the case of annual gifts, we recommend the client ‘direct’ the gift by requesting that it be used for specific purposes such as paying down student loans or funding a 529 college savings plan for a grandchild.  Or we’ll have the child agree to place the money in a long-term investment account.  Of course, this cannot be a ‘demand’, it can only be a ‘strong suggestion’.

“Definition of Financial Insanity: Providing financial support for children when you lack adequate financial resources for yourself.” 

Should you let children struggle or should you help them out?

I remember one friend’s conversation with his daughter on the occasion of her graduation from college.  He gave her a (very) used car and said, “Come visit me often, but never ask for money.”  She struggled.  She struggled to find a job.  She struggled with her early finances.  She found her own job and worked hard to be the best she could be.  She hustled to find a better job; then an even better job until she had one making six-figures and she was still in her twenties.  She became a very strong, independent young lady who stands proudly on her own two feet.  Would this have been the result had her father provided a financial safety net?  In my opinion, no.  In fact, this story illustrates what I’ve seen play out over and over in my four decades of observation.  The more you enable your adult children with financial support, the less independent and productive citizens they become.

Conclusion: If you do choose to help a child financially, it’s best to do so in very specific ways such as helping with the down payment on a home; helping pay off student loans; helping fund a 529 college savings plan for their child.  If you are the consistent source of ‘bail-out’, you will only encourage poor financial behavior and rob them of the ability to become independent human beings.