Your adult child may soon be asking you for some financial help. Your grandchild might, too. And your mom or your dad. In today's harsh economy, nearly half of American adults have given money to a family member to pay bills in the past year, according to a MetLife survey. Sometimes the gift is even a room in your home: A Pew Research Center poll in May found that 24 percent of 18- to 29-year-olds have moved back in with their parents since the recession began. And 23 million Americans now live in households with two adult generations. Before you generously open your guest room — or your wallet — consider these six frequently asked questions.
1. Which is better: giving money to a family member or lending it?
Most experts recommend making gifts rather than loans. Trying to collect unpaid debts from family members can hurt your relationships with them. But be sure to document a gift with a letter to the recipient: If your gifts to one person exceed $13,000 in one year, you must file a gift-tax return. You probably won't, however, owe taxes. You can give away up to $1 million over your lifetime without incurring a gift tax.
If you'd rather lend money, draw up a document stating the repayment terms and any interest rate. You don't have to charge interest, but if you lend more than $10,000, the IRS will treat the loan as interest paying, even if you don't charge interest. Then you may be taxed on what's called phantom, or imputed, interest income — the amount that would be charged on a market-rate loan, says Bob Scharin, senior tax analyst at Thomson Reuters. So don't make a five-digit loan without talking to a tax accountant.
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2. My adult daughter has moved back home. Should I charge her rent?
That depends. You might charge rent if she can afford it and you want her to learn to support herself. Forgo rent if she can't swing it or if you want her to save money. A compromise: Charge your daughter rent now, save that money, and decide later — when she moves out — whether to return some or all of it. You'll need to declare any rent you keep as income on your tax return.
3. How can I help my adult son get health insurance coverage?
Under the new federal health-reform law, your child will probably be eligible for dependent coverage through your employer's health plan until age 26 if he doesn't qualify for other health insurance. He doesn't have to live with you, be a student, or be your financial dependent to qualify, but the coverage can't include his spouse or children. If your employer already subsidizes dependent coverage through its health insurance plan, it must do the same for your adult child.
If your child has already turned 26, he might still be covered by your employer's plan. In many states, group plans sold by insurers must offer coverage to adult children — sometimes through age 30. But states typically have narrower eligibility rules than the federal law does. To qualify in New York, for example, a child as old as 29 must be an unmarried state resident with no other access to coverage. State laws usually don't require that employers subsidize this coverage, so you'll typically have to pay the full cost. And since these state laws don't apply to employers who self-insure, as many large firms do to save money, they are generally the rule just for small firms or individual coverage.
4. Should I cosign a loan or credit card for my son?
No. That's too risky for you. A cosigned loan or card appears as outstanding debt on your credit report, which could hurt your credit score and then your ability to borrow. Being held responsible for your son's debt could damage your credit rating even more if he winds up making late payments. And if your son were to default on the loan altogether, the lender could come after you and your assets.
5. What are the potential savings — and new expenses — if my mom moves in with us?
The savings can be big. Living with you eliminates mom's mortgage or rent, property taxes, homeowner's insurance, utilities, and home-maintenance bills. Her transportation costs will be reduced if she no longer needs her own car, and you'll save by not traveling to visit her.
The biggest expenses may be structural changes to your house. Depending on your mother's mobility, you may need to eliminate steps, widen doorways, or make a bathroom accessible. The cost to widen a door: about $850. You should also consider renovations to preserve everyone's privacy, such as giving Mom her own entrance and perhaps a small kitchen. Selling or renting her house can often produce the money to make these changes.
6. Who can help me if Dad moves in?
Research your community's senior care resources. This is important, since it's not always easy to find dependable transit services or physicians accepting new Medicare patients. Your dad may need help getting to doctors' appointments and developing a social life. "Many communities have wonderful volunteer services that can help on both fronts," says Karen Schaeffer, a Rockville, Maryland, financial planner whose mother and mother-in-law have lived with her and her husband at different times. Towns and counties often have agencies on aging dedicated to helping elderly residents. Another useful resource is a geriatric care manager, who can tell you what's likely to work best for your situation. Cost: typically $50 to $200 per hour. You can find these pros at caremanager.org, or ask your agency on aging for referrals.
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