BLOG: Don’t let the Bank of Mum and Dad go bust
Passing wealth on from one generation to the next is something traditionally ingrained in our being, and there is little doubt that for most of us it is a focus of life as we get older.
Protecting and nurturing our children as they grow is instinctive, and part of that instinct is to help them whenever we can and in any way we can, which of course means financially, no matter how much money you happen to have.
Many people will have been helped by their own parents, and now feel it is right to offer that same assistance to their own children. However, there is an important caveat – can you really afford it? I do not mean do you have the money available to be able to lend them the deposit for the house, pay for their university education or buy a car, for example. Instead, I mean can you really afford it in the longer term?
Parents will give up money to their offspring because of their nurturing instinct no matter what financial position it puts them in directly. Yet, they have to not only think of their personal needs now, but also in the future, for example, if they end up needing care that will have to be paid for as they get older. Giving away too much wealth too soon could leave you in a difficult position later on, and there is no guarantee your children will return the favour and pay for your care.
You should ensure your own financial position is secure before you think about passing on money to others. It is a lot like being in a disaster situation, a plane crash let’s say – you must put on your own life jacket before you have a hope of helping others with theirs, because without taking care of yourself first, how can you take care of others going forwards?
If you have a sizeable investment portfolio or are still earning, then you may be able to replace any money you are giving to your children in the short term. If not, then the desire to lend or give money to children becomes more problematic in light of your own potential future needs. Talking things through with an adviser who can help you get to grips with your financial position will help make this decision easier.
Offering help to a son or daughter can bring families closer, especially if there has been friction in the past. However, it is important to explain clearly how the money is being offered. Is it a loan? Or a gift? If the former, then the child must understand it has to be repaid, because otherwise lending them money can create much more friction than it solves.
You must also decide whether you will be able to treat all your children the same over time to avoid unnecessary squabbles as a result of perceived favouritism.
Anna Sofat is managing director of Addidi Wealth