It’s a natural response to reach out and help the people closest to you when they stumble. When money is the problem, the urge to simply transfer funds and make the difficulty go away can be overwhelming. But sometimes a bailout can make things worse. Here’s some advice on how to ensure that your interventions help loved ones without harming you.
1. Secure your oxygen mask first. Take a hard look at your financial situation before you even think about making anyone else’s life one penny easier. Do you truly have all the income you need to cover your personal overhead, plus a pool of cash for the emergencies that inevitably arise? If you’re carrying any long-term debt or are even just behind on the bills, address these accounts first. This isn’t about being selfish or looking out for number one; it’s a hard pragmatic fact. You have less time left to replenish your reserves if you exhaust them now. While your relatives may be suffering, a longer horizon for recovery can work in their favor long after you’re gone.
2. Study all the angles. The best support you can provide may not actually be financial. Start with research to verify that you’re helping bring about the best outcome. The lender doesn’t want any customer to just declare bankruptcy or walk away, so there’s usually wiggle room to get a better interest rate or bargain down penalties like late fees. Take a hard look at all the paperwork, and don’t be afraid to make a lot of calls. The process will also reveal a lot about how the situation came about, giving you the chance to make sure this becomes a true teaching moment, instead of a recurring crisis. Find out how your loved one got into this monetary jam. If you can’t get this person’s assurance that he or she has a plan to guarantee it won’t happen again, tough love may be the best option.
3. Keep it strictly business. A lot of parents revert to authoritarian roles when giving adult children a hand. So do older siblings when given the chance to push their baby brother or sister around. Resist. If you’re in a position to make an outright gift, do it with no strings attached. Otherwise, structure your intervention as a loan, with an interest rate and regular payments (consult the IRS rate schedule for the minimum the government assumes you’ll charge even your favorite family members). Your cash could actually end up working a little harder for you than it would in the bank. Avoid becoming the bill collector by setting up an automated monthly transfer schedule. Either way, you’re probably a lot more lenient than an outside lender. The payments will be less of a drag, and the interest rates will undoubtedly be lower.
4. Consider where you’ll pull the cash from. The golden rule of retirement is that you want to delay withdrawing from tax-advantaged accounts — your IRAs — as long as possible, to give that money more time to compound. This is especially important if you haven’t formally retired yet and would be facing a big tax bill plus a 10 percent penalty for signing that money over to a relative. If you’re in that situation, look into structuring the transaction as a loan, not as an outright withdrawal. and even then it’s probably better to cash out taxable accounts first. Also remember, mortgage and student-loan interest are deductible. Think twice before taking over those debts for any relative.
5. Think about the inheritance. Your other kids may resent the idea that "their" inheritance is being spent down to get a sibling out of trouble. Make sure everyone knows what’s going on. And consider giving the other children the option of getting an early gift, too.
Hilary Kramer is one of Wall Street’s top investment advisers, a hedge fund manager and the editor of GameChangers. You can check out her latest insights here.
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