A Guide for Parents Helping Adult Children Financially
Written By: Kevin Reardon, CFP®
One of the many issues we help clients navigate pertains to their desire to help adult children financially. Each situation is unique, especially when you have a family looking to help multiple children.
Know the Rules: Annual Gift Tax Exclusion vs. Lifetime Exemptions
Before we dive into scenarios and strategy, it’s important to know the rules around gifting. The annual gift tax exclusion allows an individual to give $19,000 per year (2026) without having to file a gift tax return. This means a married couple can give $38,000 to a child, or $76,000 if that child is married and you include their spouse. If you have three children and they are all married, you can give up to $228,000, if you are so inclined. If you give more than these amounts in any given year to one individual, you must file a gift tax return or structure the excess as a loan.
As a caveat to the rule, you can make direct payments for any individual’s health care expenses or tuition (child, grandchild, etc.). These payments do not count as a gift and may be over the exclusion amounts listed above. Keep in mind you must make the payments directly to the school or healthcare provider.
Understanding these rules, we can now talk through ways to help your children financially.
Different Ways to Help
There are a multitude of situations in which you might want to help an adult child financially. The first scenario is when you have no expectation of repayment, and the gift is below the annual gift tax exclusion. These gifts can be for an unlimited number of scenarios, including:
– Giving money to children at Christmas because you know it’s an expensive time of year.
– Helping your child pay for an unexpected expense, such as a home or car repair.
– Helping your child afford something for the benefit of the grandchildren.
The second scenario is that you may want to make a more substantial gift, which exceeds the annual exclusion amounts. In this instance, you file a gift tax return noting the extent of the gift. A common scenario where these larger gifts are made is for estate planning purposes, with the intent of reducing the value of the estate before death.
The third scenario is that you want to help an adult child make a larger purchase, such as buying a home or business, but you also want to be repaid. If you have the liquidity and desire to help, a loan or note is utilized to facilitate the transaction. It’s important this intra-family loan be properly defined in a written document that specifies the terms of the loan, such as the interest rate, amortization, frequency of payments, etc. You’ll also want to document this loan in your financial and estate plans to address the loan repayment at your death.
Align Support with Family Values
When and why you make a gift are important considerations. When you align a gift with your family values, both the giver and the receiver benefit. A values-based gift might support education, encourage home ownership, provide an opportunity to start a business, pursue a passion, or provide the means for necessary healthcare, among other worthy causes. If the gift is used by the recipient in a manner you consider frivolous or possibly even harmful or destructive, it’s an easy decision to stop future gifts. The greater challenge occurs when the gift is used for an agreed-upon purpose, but this then allows for additional room in the child’s budget for purchases you don’t agree with.
Set Healthy Boundaries and Expectations
In its purest form, a gift is meant to be given with no strings attached. With that said, a gift can be used as a teaching moment for the receiver to understand your expectations. If they don’t know your intention was to help with the payment of a grandchild’s tuition and they instead use the gift to take a fancy trip or buy a luxury item, you will likely have animosity towards the child. By the same token, the gift recipient can set boundaries, telling mom and dad they aren’t allowed to critique their lifestyle decisions. Both parties should make their intentions known. If things don’t work out as planned, both the giver and the recipient can decline future gifts.
Protect Your Own Financial Foundation
As you ponder your giving strategy, you’ll first want to make sure you’re on solid financial footing. Although this seems intuitive and obvious, it becomes a challenge when a child finds themselves in a legitimately difficult situation and you want to help. If helping the child is done at your own financial peril, it’s time to pause and reassess the various options available to the child. Rather than bailing a child out of a bad debt or financial obligation, perhaps it’s best for everyone to let the child declare bankruptcy or deal with their problem without you. In this situation, you’ve preserved your own financial viability and your ability to help the child in the future when they may need your help even more.
Communicate
If you have multiple children and you’re making a gift or a loan to one of those children, it is a strong consideration to include all family members in the conversation. Not telling all family members could significantly damage family relationships. Being upfront about a loan or a gift will allow each person to voice their opinion and receive your feedback. They may not like your feedback or decision, but it’s usually better to be transparent. If children find out about family transactions after the fact, especially if it’s after your death, it can permanently scar family relationships. It’s better to have a child upset with the parent than have them upset with their sibling.
When to Involve a Financial Advisor
If you’re making a one-time gift and it’s a relatively small amount, you may not need to consult with your financial advisor. If you want to review the impact of a larger gift or an ongoing giving strategy, consult your advisor. They can help you identify how your gifting strategy is impacting your finances, teach you ways to give in the most tax-efficient manner possible, and provide considerations before making a gift.