My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, June 25, 2018

The Taboo of Asking for Money Within a Family – Part 2

Last week in part one of this two-part series, I suggested there are three reasons why people may ask their family for money. They are: need, seed and greed. Today I discuss these three reasons in greater detail.

Need - I Really do Need the Money

Some examples of need-based requests by a child are as follows:

a) They are in a bad and/or abusive marriage and need money to get out of the marriage.
b) They need money to help buy a home.
c) They lost their job

Parents may ask their children for money for the following reasons:

a) Medical issues
b) Elder abuse by another child or another individual
c) Poor retirement planning
d) Poor fiscal environment

One of the hardest decisions a parent will have to make is; the decision to gift or loan money to a child that is in true need of the money. These are factual requests in which the need for money can be substantiated. These requests leave no question that the money has a direct intended use and will not be used for personal gratification or discretionary purchases by your child.

The weight of one of these requests is often compounded by the fact emotional issues are attached to your child’s request for money. In the end, the decision to provide financial assistance must be determined in large part by a cold hard analysis of your financial situation and your financial wherewithal to provide assistance, especially where the request could jeopardize your retirement. I discuss this is further detail below.

Requests by parents (or more likely, non-requests, but you discover a need) tend to be more readily accepted. This is just simply because the person is your parent and typically you will want to repay them for everything they have done for you. But as with a child, you still need to consider your financial position before making any emotional decision. 

Seed - Psst, I have a Great Idea

Some examples of where a child’s request for money is seed based are the following:

a) They require money to start a business

b) They require money to expand an ongoing business.

c) They require money to go back to school to upgrade their education

Requests for seed money can carry significant risk. Often money advanced or loaned for a seed money request cannot be repaid. These requests can create significant internal turmoil for parents. Many parents have always told their children to think for themselves and to reach the stars. When a child wants seed money, it often revolves around the child starting a new venture or investing in a business. These requests are often gut wrenching for the parent, as they struggle with whether they a) can afford to lend of gift money to their child and b) often the parent has preached initiative and grabbing the brass ring when the chance presents itself and now they may be roadblock to following through on that initiative and finally c) parents are often aware many business start-ups go bankrupt, so practically it is a huge risk to loan or gift seed money for a new business.

Greed - I am a Money Leech, I Admit It

Some examples of where a child’s request for money is greed based are the following:

a) Need money for a vacation.

b) Need money for personal vanity (such as cosmetic surgery)

c) Need money for a discretionary purchase such as a large screen TV or car.

Requests for greed money are often rejected by objective parents, but many parents will do anything for their kids, even if it is detrimental to their financial future and for non-necessities. Many of these greed requests fuel the notion that some children just see their parents as a bank. Many of these same children are often characterized as the type of children that will hover over your body waiting for you to die. While this view is extreme, it is not without basis. We all have observed children who have had fractured or little or no relationships with their parents over the years, suddenly arrive on the scene asking for money or when their parents take ill.

Separating Emotion from Finance

The decision to acquiesce to a request for money from a child or a parent needs to be analyzed as a purely financial decision. Can you afford the financial request or not?

Where it is determined you have the financial wherewithal to grant a request for money, you must then make an emotional decision as to whether you feel the request is warranted or of such an urgent nature you need to seriously consider granting the request. Where you have the financial ability to provide funds, the decision can easily be rationalized as an early inheritance or money you can afford to lose. The issue is these cases is often more philosophical, do you make the child stand on their own or assist them?

The more typical and gut-wrenching cases are where it is determined you do not have the financial wherewithal and you must decide if you are you willing to jeopardize your retirement to assist a child financially.

Let me speak to my Accountant and Financial Planner

Any parent or child considering granting a request for money to a child or parent needs to review the issue with their accountant and/or their financial planner or engage such. Your accountant or financial planner has the ability to be detached and provide objective advice from both a financial perspective and emotional perspective.

For some people, money is never the issue. But for most, it is a significant issue, even where you have saved enough for retirement. Your accountant or financial planner can run several financial scenarios that will consider the impact of making a loan/gift on your retirement funding and allow you to review the financial consequences of advancing the money (assuming you will never see it back). For many people, the answer will never be entirely clear from a financial perspective, as the elephant in the room is always longevity. It is difficult enough to plan for retirement when you don’t know how long you will live, but that decision is further complicated when you must reduce your retirement nest egg for an unexpected cash request from a child or parent. However, at minimum you need to review the impact of making any significant gift upon different retirement scenarios.

Surprisingly, the few times where I have been involved in these type situations, it is often not just my financial expertise that is of value, but the fact I can relay my experience in other similar situations. As I am not emotionally attached, I can coldly state on a no-names basis what I have that observed in other similar family situations.

You mean I Must Speak to my Lawyer also?

If it is not bad enough I have already told you to pay an accountant and/or financial planner for objective advice, you likely will also need to spend more money to amend your will to account for the gift or loan. Your lawyer may do this via a Hotchpot clause, see this blog post on the topic or a simple promissory note.

The Tugging at my Heart (Purse) Strings is too Much

Some people will realize after meeting with their accountant or financial planner that they cannot afford to assist their child or parent. They often feel guilty and/or sad they cannot assist; or in some cases dejected they did not achieve a greater level of financial successes such that they could assist their child or parent. But, for financial reasons, the discussion ends as it is clear they cannot afford to assist their child or parent.

Yet, over the years, I have seen several parents assist a child financially when they cannot afford to do so. I call this the "blood is thicker than water” scenario. These parents cannot stand to see their child suffer financially or health wise and despite the objections of their accountants, friends, family etc. make the gift or loan. There is not much you can do or say in these circumstances, except try and help assist the child or parent to reduce costs where plausible and to review if there are any ways to make up for the loss of retirement funds. In the end, their child’s or parent's well-being far outweighs their concern for their own financial well-being.

There you have it, my discussion on asking for money. I still think someone should write a book on the topic, it just will not be me.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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