by Don Kuehn

Sometimes it’s easy to decide how much financial help to give a grown child or relative. In the face of a serious medical condition or a life-altering event such as job loss, bankruptcy or divorce, there’s nothing wrong with helping out financially – either thorough gifting or a loan. But at what point can a rescue mission lead to addiction, dependency and enabling behavior?

“If coming to the rescue becomes a pattern, you could have deeper problems,” according to Karen McCall, founder and president of the Financial Recovery Counseling Institute (www.financialrecovery.com/).

“Frequently, parents who rescue their grown children too eagerly actually are using money to feel needed, or to prevent the child from becoming independent,” McCall says. “Bailing a grown son or daughter out of one financial jam after another can be one of the most unkind things a parent can do. At some point, frequent rescues from financial calamity become an addiction shared by both the givers and receivers.”

Children need to learn early-on about the value of a dollar; how credit works in our society; how to be responsible spenders and savers. Teaching a child to set goals, to save for the things they want and to delay gratification until they can actually afford that new toy, new car or expensive prom night bash, are life lessons that are repaid over and over.

Setting a good example helps, too. Most of us learn what we know about money from the adults who raised us.

No matter how well we plan, the financial bogeyman can strike. Families will sacrifice a lot to help a child through a rough patch. But it is important to cut the money off if you ever feel you are being taken advantage of.

Both family and economic counselors generally recommend that you establish the rules of the game right from the start. Make any loan transaction as business-like as possible. Put it in writing. Provide for regular principal and interest payments and agree on a closing date for the loan.

Make the terms liberal if necessary, but be sure all parties walk away with a clear understanding of their responsibilities.

When your kids are young adults it is important for them to establish good credit. One day it may help them rent their first apartment, maybe even get a decent job. Students, both high school and college, are tempting targets for credit card companies. That's where the future growth in their industry will come from.

Most important: NEVER co-sign a loan or credit card application for a child or other relative. Adding your name to someone else's debt is a very serious financial (mis)step. If the primary borrower falls behind in payments, guess who the lender is going to come after to satisfy the loan? It will be the one from whom they have the greatest chance of recovery, that's who. That's you!

Not only will the transaction be a blight on your credit report, but the bank can sue you for the amount of the loan … plus interest. You could face having to sell your own home to pay off a loan made to someone else! And should you need to borrow money for your own purposes, like buying a new car, a prospective lender may decide you are overextended because of the "good deed" you tried to do.

For different insights to the whole problem of debt and its related consequences, I suggest going to www.myvesta.org/. The entire site has valuable information, but the "news" section contains articles on a variety of interesting subjects.

Building a business

On the other hand, many great businesses in America were started only because Mom and Dad were able to plant a little seed money. Think about it though, if a legitimate lender won't advance money based on your child's business plan, why should you? If you are going to act like a banker, think like one.

What kind of collateral will you hold? Will you own a piece of the business? Will you be able to play the role of "silent partner" if it’s your money tied up in a struggling enterprise? Make a business loan only if you are going to be willing to sue ¾ yes, go to court ¾ to collect a bad debt. 

There are tax consequences to consider before deciding to help get a business started. You can't deduct any part of a bad loan from your taxes unless you first try to collect (through legal action, if necessary). By law that means you must have a written loan agreement, a fixed repayment schedule, security or collateral, accurate records of repayment, proof that the business was solvent at the time of the loan and a copy of the borrower's business plan.

Unlike a bank, that would routinely ask for these assurances, few parents have the foresight to get them. That's why they are seldom able to write off a failed loan. Depending on the size of the note, it may be easier just to consider it a gift rather than a loan. Any individual can give up to $10,000 a year to anyone they choose ($20,000 from a married couple) without the giver or the recipient owing any tax

Drawing the line between enhancing a child’s life and ruining their life is difficult and the line is often not clear and bright. In general, today’s parents have more money to share than their own parents did, but today’s parents also live longer for many reasons including advances in medical science and improved health habits. That means they'll be depending on their assets for many more years.

When it’s time for that inheritance to be passed on to children, the recipients may be approaching retirement themselves. Hopefully, rather than waiting for a big inheritance to drop into their laps they’ll be dealing with their own estate planning concerns, like what to do with their nest-egg, how far to go to provide for their children, and how much they’ll need to live out their lives in a comfortable style.

Are You in Financial Trouble? Find out with the Financial Recovery™ Self-Diagnostic Test This test will help you determine if you are currently experiencing difficulties with money or if money worries are creating difficulties for you and your relationships. Do you often take cash from your checking account and, at the end of the day, have no idea where you spent it? Do you feel like you have little to show for your money? Do you constantly carry credit card debt? Are your minimum payments on your credit cards so large that they prevent you from saving or doing things you'd really like to do? Do you ever use one credit card to make the payment on another? Do you ever charge the entire cost of a work-related dinner or dinner with friends, pocket the cash, and "forget" to pay off the credit card? Do you have problems saving money? Do you have trouble sticking with a financial retirement plan? Do you find it "impossible" to save because of unexpected expenses? Do you feel that you are earning less that what you are worth? Do you ever feel compelled to buy something immediately? Has money ever created problems in your relationships with your family or friends? Do you feel that bankruptcy is the only way out of your current debt? Do you owe back taxes to the state or the IRS? If you answered "Yes" to two or more questions, you may need to improve your relationship with money. For more information go to www.financialrecovery.com.