When it makes sense to help your adult kids financially — and when it doesn’t

Spending the holidays with your adult children and the grandkids?

If so, their futures may be on your mind, especially if you sense – or they just flat-out say – they’re not flush enough to buy a home, put their own kids through school, or pay off big debts they’ve acquired.

As a parent, you may wonder if you should help them or if it makes more sense to stay out of it and leave them money after you die, if that’s an option.

To figure out what is right for you, here are four questions to consider:

Think carefully about how much you can comfortably offer.

“It’s understandable to want to support your children. (But) balance that emotion with whether you can afford it,” said Rob Williams, head of Financial Planning and Wealth Management Research at the Schwab Center for Financial Research.

Consider your cash inflow and your spend rate along with how much of a cushion you’ll need to handle unexpected medical expenses or long-term care, said Dawn Jinsky, a certified financial planner and a partner at Plante Moran.

If money is tight, Jinsky noted, it’s okay to say, “We really want to but can’t right now.”

Or maybe you feel you can afford to give money now, just not on a regular basis. So set expectations. “Frame it as a one-time gift,” Jinsky said.

Your children’s financial circumstances won’t be identical and you may be considering helping the one who currently has the greatest need.

But if your goal is to be fair to your other kids, too, you can do that in ways that don’t require you to part with more money now.

Say you have three kids and plan to give one $50,000 today. You might amend your estate documents to make sure the other two children each get $50,000 more after you’re gone, Jinsky suggested.

But you might want to explain that to all three kids. “Communication is key when it comes to family dynamics,” she said.

Assuming you will have what you need to live comfortably, there are three potentially good reasons to give your offspring money while you’re alive.

First, they may benefit more from financial help in their earlier adult years than, say, in their 60s, assuming you die decades from now. “Your dollars may have more of an impact when given during your lifetime rather than upon your passing,” Jinsky said.

Second, it gives you an opportunity to support them in ways that are meaningful to you.

“Anchor a gift in your values. Your money speaks for you. Make sure it says what you mean,” said Williams. When his own father became ill, he wanted to give money to his grandchildren and wanted it used for education, so he set up 529 plans for them. But he also wrote each child a personal note, expressing how proud he was of them and how important education had been in his life. “It was the happiest I’ve seen him. He died three months later,” Williams said.

Third, if your estate is large and likely subject to tax after death in your state, if not at the federal level (where individuals can exempt up to $13.99 million this year and $15 million next year) giving gifts can reduce your taxable estate.

If you have an adult child who regularly overspends, mismanages loans or has an addiction, think hard before helping.

You might not want to bail them out if doing so would just reinforce their bad habits. “In an ideal world, you’re supporting assets and not repairing liabilities,” Williams said. “Generosity ideally doesn’t create dependency.”

But you might want to help if part of your child’s predicament isn’t necessarily their fault – for instance, they’re saddled with unexpected medical debt or have a disability.

If you do decide to help but worry the money won’t be handled well, you can pay a given expense directly.

“Look for as many avenues that you can to benefit the child but not put financial means into their hands,” Jinsky said.

Make an annual gift: In any given year you may give up to a certain amount – it’s $19,000 this year and next – to as many individuals as you choose. That amount doubles to $38,000 if you’re making the gift with your spouse.

The money is tax-free to the recipient. And so long as the amount you give to any one person doesn’t exceed the $19,000 cap, it won’t count against your federal lifetime gift tax exemption – which is as high as the estate tax exemption.

If your gift does exceed the cap, but you’re nowhere near maxing out your lifetime exemption amount, you won’t owe tax on the excess but you will have to file a gift tax return.

Note that once you give the money you cannot control how it will be used. “The most difficult part for parents in gifting that amount is a little bit of ‘Let go and let God,’” Jinsky said.

Pay expenses directly: The bills you pay for your child’s or grandchild’s medical or educational expenses does not count as a gift. “Parents can make payments of any amounts directly to the institution if it is for education or medical expenses,” Jinsky said.

But any other money you use to pay their expenses – eg, your child’s mortgage or credit card debt – will count as a gift and is subject to the now-$19,000 annual exclusion.

Establish a trust: A trust is a more complicated way to gift money, Jinsky noted. But it can be designed to pay out in ways best tailored to your adult child’s or grandchild’s circumstance and to protect the assets in it from being drained. For instance, if the adult child is in a bad marriage, has creditors chasing them or has special needs.

“Typically, the purpose of the trust is for the parent to name a trustee to retain control over the assets to protect and preserve them,” she said. “In many instances a parent will choose to never have the trust distribute outright but instead remain intact for the child’s entire lifetime.”