In my previous post, I suggested that the first thing you should do if you are worried about your children’s or grandchildren’s financial position is to ask them if they need help.
In our experience, many will thank you and tell you that they are just fine.
But what if they tell you that things are tough, and they really could do with your help?
There are two ways in which you can help:
-A short term bailout. A relatively small lump sum gift can make sure that essential expenditure is covered for the next month or so, while you look at government support and a plan for a longer-term.
-A plan for the future. This plan will involve a review of your own and your child’s financial position, some careful thought, and, probably, some documentation.
Whatever you do, it’s essential to be sensitive to this situation and to understand that the additional stress of these difficult times may result in some extra friction.
In the UK, we aren’t accustomed to talking about money with family and friends, and there will be some difficult issues to deal with in this process.
Parents providing financial assistance, in particular, should try to avoid making value judgements, as this will make the whole process more complicated, and, ultimately, less likely to succeed.
It’s also important to remember that different generations have different ways of doing things.
So don’t be offended, for example, if your children listen to your suggestions indulgently, then immediately go off and Google-check your facts. In essence, this is just one example of the differences in the way the generations work.
The short term bailout should be based on a quick estimate – the intention is to remove the immediate worries and those that might surface while you are putting together your plan for the future – and it is likely to be a lump sum.
It may, however, be worth considering some of the lessons from the Bank of Mum and Dad, before making the payment. The bailout will need to be funded from your emergency fund – this is an emergency, after all!
The Plan for the Future
This plan intends to see your children through their financial difficulties and to provide everybody with a longer-term solution.
The first thing to recognise is that you can only spend money once – if you help your children financially, there will be an impact on your finances too. If you give your children too much financial assistance now, they might have to return the favour in your later life.
So, you are going to need to review your financial plan (or get one, if you don’t have one!).
You will probably have to make some compromises in your financial plan. Still, these may be as simple as accepting a higher risk that your liquid funds may run out during your lifetime (making it more likely that you may have to downsize or raise some money against the equity in your home, in later life).
It will also be essential that the son or daughter you are helping has a financial plan too – starting with their outgoings (broken down into essential and discretionary items) and income, liabilities and assets, and then projecting them into the future.
This financial plan will help everyone identify how much might be needed, and in what form – a lump sum, regular payments or a combination of the two.
Drawing up the two plans will also help you to identify if and when more dramatic changes may have to be made – such as downsizing or a similar change in lifestyle – for child or parent.
It will come as no surprise that both financial plans are best drawn up by a professional.
It’s not a simple job to do, and, if you ask somebody with experience and expertise, like a Certified Financial Planner or Chartered Financial Planner, your plans shouldn’t include fatal omissions or errors.
There will, of course, be a cost attached, but the taxman should help with that (more in a forthcoming blog post), and drawing up a financial plan should produce a higher return than any other financial change you might make.
Lessons from the Bank of Mum & Dad
In the last couple of decades, the Bank of Mum & Dad has become a vital element of the UK property market, and it has provided some useful lessons (mostly learnt the hard way) about how to deal with issues associated with the older generation supporting the younger.
In particular, it’s essential to establish the following:
-Is the assistance in the form of a gift or loan?
-Will the assistance be made as a one-off payment, regular payments, or a combination of both? If regular payments are to be made, will they be made automatically (via standing order, for example) or on request, and when will those payments be reviewed?
-If the payment is a loan, will interest apply (this is particularly important where there are siblings, who aren’t receiving assistance) and when is repayment expected (or what will trigger the commencement of repayments)?
-What will happen in disaster scenarios such as death, ill-health or marital breakdown?
Ideally, these matters should be documented, and it usually makes sense to have some professional help with this.
Fairness
It is crucial to decide on a definition of fairness, particularly if you have more than one child, and a good financial planner can help with this.
There are two prevailing views of fairness in this situation:
-The “equal shares” rule. Each child receives the same amount (in inflation-adjusted terms), and it is accepted that the children might spend the money on different things. A gift made to one child now might be balanced out by another child receiving a more significant percentage of the estate on the second death.
-The “fair but not equal” rule. Each child receives a differing amount, according to a perceived need. For example, one child may have married the son or daughter of wealthy, and generous parents, whereas another child might be single and unable to work. The second child would receive more financial assistance than the first, in this case.
It is also important to remember that if you are helping a married child, the concept of fairness across both sets of parents will need to be considered.
Often this is a case of considering whether you are happy to help, even if the other set of parents cannot (or will not).
It is, of course, made more complicated if we are dealing, as we often are, with families where there has been a marital breakdown in the past.
It might sound like there is a lot to consider before making your assistance plan for the future, and it might seem like it would just be easier to give a round number to a child in need of assistance.
While this might potentially offer a short term solution, it is likely to create all sorts of problems in the future. It’s far better to take some time and make sure the solution works for everybody concerned, now and in the future.
In my next post, I’ll explain how the taxman can help you to provide support to your children.
