More and more these days, retired clients want to provide financial help to an adult child in his or her 30s, 40s or 50s. That child may have lost a job during the recession, gotten divorced or need help paying for a child’s college education. The problem is, the parents are often in a somewhat precarious financial situation themselves, and every dollar they give away to a child puts them at risk of depleting their retirement savings.
One creative solution is for the parents to make a loan that serves as an advance on the child’s inheritance. Even though it’s a loan, the chances are the client is never going to see that money again. The child signs a promissory note with a low rate of interest, and the note is due to the parents in 30 years or upon the death of the second parent, when the estate settles. Parents like this arrangement because it’s a way to give one child some money while treating all children equally in the estate. The estate split can still be equal, and the loan for the needy child gets repaid back to the parents’ estate from the child’s inheritance. The children like this approach because the money is a loan, not a handout.
Another approach is for the parents to guarantee a bank loan instead of lending the money directly. This can be useful for the parents because it doesn’t deplete their assets. But it requires more documentation, and the banks typically won’t offer a personal loan like this for a term longer than 10 years.
Wall Street Journal, November 10, 2014
