3 things to know before loaning your adult kids money

atmIt's an age-old problem that's been with us for ages. You raise your kids to be independent adults, but...what if something goes wrong?

What if, for instance, they lose their job, suddenly run out of cash and need help? Or what if they got in over their heads financially with credit card debt and need a loan to help pay off their debt?

Do you look the other way and let the chips fall where they may, even if that means they wind up on the streets? Or do you help them out? And what if they need a lot of help? How far should you go to get them out of the bind they're in? And at what dollar amount are you really helping them out, or just enabling them to continue their financially unsound lifestyle?

That's a lot of questions (even from me!), but quite likely, these are questions that are being asked in more households than you might imagine. In the summer of 2008, for instance, before the Great Recession truly kicked in (although the economy officially began going south in December 2007), The Today Show ran a piece about "sandwich lenders" -- adults who were being financially squeezed by adult kids who needed a loan and elderly parents who needed financial assistance.

The report said that Virgin Money US, a firm that formalizes loans between relatives, estimated based on data from the Federal Reserve Board that about $53 billion in loans are made between family members every year.

And just last December, CreditCards.com conducted a poll that showed that two out of every five parents in the U.S. are giving their adult children money. Most common money bailouts? Auto loans, with medical bills coming in second, followed by help with utilities, credit card payments, student loans and mortgages.

I wish I could say I had no experience in this matter, but I do. It's not much of a secret to any regular WalletPop reader that I've had my share of financial troubles over the years, and, yes, that's included going to the Bank of Mom and Dad. (In fact, as an example of how pervasive borrowing from parents seems to be, there's even a reality TV series on SOAPNet , which debuted last September, called Bank of Mom and Dad.)

So I figure I'm as much an expert on the topic as anyone, and I thought I'd offer three, been-there-done-that suggestions to parents and adult children who ultimately find themselves in the middle of a family financial transaction.

Make the transaction as businesslike as possible. I've interviewed quite a few people about this topic, and they all say the same thing. "In my experience, such loans are most successful when they're executed with a written contract, specifying all terms of the loan -- for example, the amount of the loan, any interest charged and the payback schedule -- and are signed by both parents and adult children," offers Carleton Kendrick Ed.M., LCSW, a family therapist and co-author of "Take Out Your Nose Ring, Honey, We're Going to Grandma's!"

Tina B. Tessina, (AKA "Dr. Romance") a psychotherapist and author of "Money, Sex and Kids: Stop Fighting About the Three Things that Can Ruin Your Marriage," says pretty much the same thing. "If you want your adult children to be independent, self-sufficient grownups, you need to be very careful about loaning them money," warns Tessina. "All money transactions should be businesslike, with a signed note and a repayment schedule. Of course, things are different in the case of a catastrophic illness or a disaster, but it's still important not to cause feelings of unfairness among siblings, dependency in your children, and the lack of self-esteem taking charity brings."

With all that said, I'll cop to not being very businesslike in my transactions with my parents when I've had to go to them in the past and ask for a loan. We never had any sort of contract, but fortunately, it wasn't needed. I've always understood that if I want my self-respect back, I needed to pay them back, and that's exactly what I've done.

But life can get complicated, and things can come up, so I certainly can't argue with the idea of having a written contract or signed note in place and then following those written agreements. Either way, it brings us to my next suggestion.

Your parents and you are people, not businesses. As noted in the first tip, it's important that you treat the loan in as businesslike manner as possible, but let's not take it to extremes. Kendrick cautions that any loan a parent makes to a son or daughter "should be structured based upon realistic expectations of the child's ability to both keep up with the payback schedule and to pay back the loan in full."

So if you want to maintain a good relationship with your child, Kendrick cautions that you shouldn't loan money without realizing that your children may encounter life circumstances that may make it difficult, if not impossible, to remain on schedule with their loan paycheck schedule.

Janet Perry, a small-business owner in Vallejo, California, who runs a successful needlepoint business, says that she and her husband lent their then 24-year-old son some money around the beginning of 2009, so he could pay off some debts. He had been paying them back on schedule until this past October, when he lost his job.

Perry had several options. She could have insisted on him finding a way to keep to his monthly payment schedule, or she could have decided to completely forgive the rest of the loan.

Like her needlepoint, though, Perry threaded this one with admirable skill. "We forgave him his payment to us in November," Perry says, "in return for helping me with unpacking from our recent move and for helping me around the house and with Christmas decorating."

As Perry notes, she was pleased that she'd been neither a complete softie nor forced to resort to the role of loan shark.

Try to contain the guilt.As the son or daughter wonders if they're some sort of financial failure for having to go to their folks for a loan or handout, and their parents hope this isn't the beginning of a trend, in both cases, there's a little bit of guilt involved. The parents are most likely worried they somehow failed to instill financial responsibility in their kids, while their child is feeling, well, more like a child than the adult they actually are.

And while some of this guilt is good -- nobody should want to sponge off their parents, and no parent should ever want their kids to become financially dependent on them -- life happens, and when you need a helping hand, if you can't turn to your family, who can you turn to?

Irina Firstein, a licensed clinical social worker, therapist and relationship expert in New York City, offers the right perspective when she says, "I don't think it's a big issue with parents lending, or for that matter, giving their adult children money -- in hard economic times or not. Parents are there to help their children always, in any way they can. The issue is, are the adult children hard-working, responsible adults? Or is it an enabling situation?"

If it's the latter, Firstein adds that she doesn't think it's appropriate to give adult children money. It's also not a good idea if it'll have a serious impact on the parents' financial situation. After all, if you lend money that you need to get by to your kids, who will you turn to? Your own parents?

In any case, whether you believe "Neither a borrower nor a lender be" or "Bail out adult kids, not banks," these discussions are one of the least enjoyable family conversations you can have. Do you agree? If you've had your own experiences lending to your kids or borrowing from your parents, chime in and let us know how that went for you.

Geoff Williams is a frequent contributor to WalletPop. Perhaps not surprisingly, he's also the co-author of the new book, "Living Well with Bad Credit."

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