Why You Shouldn't Over-Support Your children:

I received almost two dozen responses to last week’s newsletter titled: “9 Habits to Break After 60 for a More Enjoyable Life.” Although we received comments about different sections in the last newsletter, most feedback was about the idea of not over-supporting your adult children. Some of the feedback was critical, which is understandable given that this subject is sensitive for many people.

I want to dive deeper into the subject and explain why you need to be careful when providing ongoing support to your adult children, as the outcome can be dramatically different from your original intention.

Several years ago, in one of the periodic planning meetings with our clients, who were in their late 70s at the time, we discussed the most optimal way to gift funds to their children (e.g., cash vs. appreciated stock, but this is not relevant right now).

This was not a new strategy for them, as we had talked about the subject of annual gifting for many years.

As we continued discussing the appropriate amount, my clients suggested that their children would certainly appreciate a higher amount. 

It was clear to me that the children were facing some financial difficulties. To look into this further, I offered to meet with them the next time they visited our area for the holidays. The meeting was promptly scheduled.

I can’t exactly explain why I associate the word “child” with a person in their 20s or 30s. There’s no logical reason behind it. To my surprise, I learned that the children of my clients were in their mid-50s and wanted to dive into retirement planning and other more complex planning ideas during our initial meeting.

As we continued exploring the children’s finances, it became abundantly clear that they were nowhere near a comfortable retirement. In fact, with their existing level of savings, it would not even be possible for them to retire unless they made some dramatic adjustments to their lifestyle.

When we discussed their income and expenses, I immediately noticed the annual gifts from their parents represented close to a third of their income. It was around $60,000 for each spouse from both parents, matching the annual gift tax exclusion at that time. 

None of the annual gifts were ever saved. It was also clear that without the annual cash infusions from the parents, this couple in their 50s would not be able to afford their lifestyle.

What is the moral of this story?

I have absolutely no doubt that my clients genuinely wished to support their children by providing significant annual gifts for many years. 

Unfortunately, the outcome was not what they had hoped for. Instead of improving their children’s lives, they made them overly dependent and complacent.

The children were aware of their parents’ ability to support them, which resulted in no immediate incentive for them to focus on their own savings and finances. They enjoyed more than they could afford, knowing the parents were always willing to help.

Even though this was never mentioned, there is a strong possibility that the children expected to receive a sizable inheritance and based their entire retirement plan on this assumption.

The question then becomes how they would be able to manage large sums of money with such limited financial literacy…

Will your ongoing financial support of your children result in the same outcome as for these clients?

To ensure I present my ideas on this subject in a balanced manner, there are many viable options to support your adult children, including but not limited to:

• Creating 529 college savings plans to support your grandchildren and lower the burden on your children
  
• Taking advantage of their lower tax bracket by transferring appreciated stock
  
• Reducing the size of your estate if you believe it would be taxable at the state or federal level

The bottom line is that you want to be thoughtful when providing significant and/or ongoing financial support to your adult children.

You want to make sure that what you do actually helps them become more independent and responsible for their own financial and life decisions.