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Parents Need to Set Limits With Adult Children Seeking Handouts

December 06, 1998|LIZ PULLIAM | Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine

Q Your Nov. 22 column about gifts and loans to adult children hit a nerve. Every time I turn around, one of my adult children has a hand out, asking for money. They all have good jobs and nice homes. You talked about how to give, but how about if you want to turn off the tap?

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A It's scary that you've come this far without learning how to set boundaries with your kids. But better late than never.

You and your spouse need to sit down and talk about when you're willing to help your adult children and when you're not.

Some parents want to help with education expenses, some want to be there only in extreme emergencies, and some want to institute a program of planned giving so that every member of the family knows how much to expect each year. These decisions should be based on your own financial situation and temperament.

If you don't want to give money to your kids, that's also fine. The choice is yours.

Once you've agreed on the rules, you need to communicate them to your children. In some families, a sort of competitive "gimme" spirit develops when one sibling sees another getting a parental cash infusion. You helped Suzy replace her furnace, so Billy wants help with his house down payment, and then Megan thinks you should help her buy a new car. Knowing the rules, whatever they are, may help cut down on the extended hands.

There is bound to be friction, especially the first time one of your kids tests the boundaries and demands money for something you've placed off limits. Your children may not have learned how to set aside an emergency fund or save up for what they want, and they may face a real financial crunch. But to preserve family harmony--and make sure you have enough money to enjoy yourself--setting these limits is essential.

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Q I thought your answer to the parental loan question in your Nov. 22 column was incomplete. Interest-free loans from parents to children can have serious estate and income tax repercussions in certain instances. Lending money to children can be a real trap for the uninformed.

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A That's true in more ways than one, which is why I suggested that any parent with enough money to make a big loan or gift to an adult child first get some good estate-planning advice.

Parents sometimes make interest-free loans to their adult children on top of other gifts that use up the $10,000 annual gift exclusion, so the foregone interest would be subtracted from their lifetime $625,000 exemption. In addition, any loan of more than $10,000 can also create "phantom" income that the parents might have to declare, and pay income taxes, on their tax returns. The interest rate used in determining such phantom income is based on federal formulas, depending on the term of the loan.

The rules are complex, which makes professional help important, and the smartest givers coordinate their generosity with an overall estate plan to reduce taxes, both in this life and beyond the grave.

To Readers

A dozen of you responded to my call last week for money-saving ideas to help the person who was trying not to live paycheck to paycheck. The most often-cited idea was simple: Track every penny.

Another popular suggestion was to shop around for cheaper auto and homeowners insurance, which can save hundreds of dollars a year. (One caveat: Some insurers tack on a penalty if you switch to another company before the policy's next due date.) A few of you smart-alecks also suggested canceling subscriptions, including to The Times, but I'd say the priceless advice you get here (plus the grocery coupons) more than offsets the cost. Here's a sampling of your ideas:

From G.R.: Make a simple list of expenditures, and then keep track of what is spent in each category on a daily and monthly basis. My wife brought this simple idea to our house more than 50 years ago, and the accounting did wonders during the first years of living together and getting started after World War II. We were able to put money away for many items that otherwise would have cost more due to financing charges. Both of our girls picked up on the idea and use it in their own homes.

From A.K.: Clipping coupons and taking advantage of food stores' two-for-one offers is a great way to save a good deal of money when shopping for groceries.

From J.K.: Quit "going shopping." It is not, and should never be considered as, a social outing. Social activities are interacting with people, not interacting with a sales clerk!

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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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