How To Financially Support Your Parents Without Jeopardizing Your Finances

Dear Providing for Parents, 

First off, thank you for sharing. This can be such an isolating and stressful topic. Deepak Chopra jokes the way to frazzle even the most zen yogi, is to add their parents to the mix. Layering on the taboo topic of money can feel like a double whammy.

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Money is highly emotional - tapping into our survival instincts, the way we were raised, and our deepest fears and feelings. Family relationships can inflame these emotions, with shifting alliances, long-standing issues and competing values about what money “should” be for.

With that said, you’re setting out to do something incredibly inspiring. In supporting your parents financially you can give them far more than just “money” - you can give them security, dignity, and peace. Let’s match up your good intentions with a good process to minimize sparks and drama.

‍“It is one of the most beautiful compensations of this life that no man can sincerely try to help another without helping himself” - Ralph Waldo Emerson

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Step 1 - Figure out how much you can offer

Amid constant media coverage of financial support that Americans are providing their adult children, it’s easy to overlook that millions of middle-aged Americans are giving money to their parents. A recent GoHealth survey found that a third of folks in their 20s-40s help their parents financially (and many also manage their parent’s healthcare). And these amounts can be substantial, a recent AARP research study found 20% of adults give > $5,000 per year. 

So how much can you personally offer without jeopardizing your finances? This is a space where the rule of “put your own oxygen mask before helping others” applies. You need to be on solid ground to offer the best and most sustainable support.  Knowing what you’re able to offer 

(a) puts you in the best position to communicate with your family about what you can do and why

(b) helps you to “underpromise, overdeliver”, preventing undue stress on your personal relationships, your own finances, and your parents finances.  

Questions to ask yourself:

• Enough for today: Are you in a position to give the money? Do you have extra room in your monthly cash flow? If you don’t have the financial bandwidth to help at a given moment, it’s important to do the hard thing and say “no.” Be honest with yourself and your family about what you can do now and what you hope to do in the future. Maybe you’re not currently in a place to cover your parent’s rent, but you could help on a smaller scale, like paying a utility bill or sending home a little something each month.
• Enough for tomorrow: What would giving mean for your progress toward other critical milestones like saving towards financial independence, funding kids’ education, building an emergency fund, getting out of debt, or starting a business? A starting rule of thumb is to shoot for saving at least 20% of your pre-tax income towards the future, and work backwards to then figure out how much you could give while still maintaining that savings rate?  At Steward, we help families run projections to understand the trade-offs involved in giving (e.g., how much would supporting parents at various levels push out when and if I could hit financial independence?). Keeping in mind how much you can afford to give is very important when considering helping your parents financially. Your heart may be in the right place, but by choosing to help your parents, you are delaying your own retirement and financial freedom. Don’t trade off too much of your financial freedom in order to help your parents; it will lead to disaster in the long run. A good check is to make sure that after helping your parents out, you still can save at least 20% of your income. If you can still save 20%, then you’re in good shape for your own retirement. You don’t want helping your parents to hurt you. 
• You can use the Steward app and our Financial Freedom Projector to figure out if you’re hitting that 20% threshold and to find out at what age you have the option to no longer work. 
• Check in with your goals: Is this always something you’ve wanted to do, or is this being forced on you by others? Giving money to family is a big deal, and it could be a long-term commitment depending on their needs. Are you prepared for that? It’s important to be financially and emotionally ready to support your family in this way. Otherwise, it could lead to hurt and resentment on both sides.

As you consider how much money to give, don’t forget about the annual gift tax rules. 

In 2022, you can give up to $16,000 per individual per year. If you’re married, that number doubles. For example, you and your spouse could each give $16,000 to your mom in one year, totaling $32,000.

If you exceed that amount, you’ll need to report it to the IRS via Form 709. Any amount over the allowed limits will come out of your lifetime exemption, which currently sits at $12.06 million ($24.12 million for married couples). 

Luckily, there are some ways to get around this rule.  If you want to help pay for a family member’s medical expenses, you can write a check directly to the medical institution, and the IRS doesn’t consider that a gift. 

Step 2 - Understand how much they need

According to a survey by GOBakingRates, an overwhelming majority of adult children—73%—have not had a detailed conversation with their parents about their finances. One of the primary reasons why survey respondents said they haven’t had “the talk” yet with their parents is because they don’t know how to have the discussion. This is a spot where how to have the conversation matters far more than the conversation itself. Let’s start there. 

Steel yourself 

We remind families we serve of the 3 R’s to boost their courage:

(1) Reciprocity - Your parents likely found a way to talk to you about topics as awkward as the “birds and the bees”. You’re returning the favor. 

(2) Resist-Persist - Financial psychologist Mary Grisham shares, “You’re either going to have this conversation by plan or by crisis. It’s going to happen.” Or in other words, what you resist now will persist. Doing this now will be easier than doing this later as your parents age. 

(3) Relief - AARP studies show that most parents recognize the importance of sharing their financial information with their children… they’re just waiting to be asked.   

Thoughtful timing

Time is of the essence for these conversations. Here are the top 3 traps families fall into, and how to avoid them.

(a) “the holiday reunion” - little kids, extended relatives, alcohol can complicate the mix. Learn from their mistake and choose a time free of distractions. That may make the day after a holiday meal a better pick. If you have kids, that may mean hiring a sitter so you can focus just on your and your parents.

(b) “the airport car ride” - procrastinating on having the conversation, and then having it a rushed way. Therapists often call this the “door-knob” conversation, where someone finally brings up what was really on their mind, as they have their hand on the door to leave the room. Choose a time where you’re not time constrained, potentially even putting time on the calendar in advance.

(c) “the good for you not for them” - Make sure you choose a time of day when your parents are most alert and engaged, especially if they’re aging and starting to lack energy.

Repeat Game

This will probably be a progression of conversations vs. a one-time sit down. It often takes time and several attempts to get your parents to open up to you. 

The right back-up

Figure out who should “be in the room where it happens”. You don’t have to go this alone, and back-up can often help facilitate the conversation. That might be a sibling, aunt, or uncle you trust, or a professional like a financial therapist or wealth advisor.  They can help moderate the discussion, so it feels less confrontational. 

Conversation starters

Choose from this list of conversation starters, depending on your parents’ style of talking about money. 

The Direct: “As you get older, It would mean a lot to me to ensure you’re comfortable going forward. I’d like to find out more about your finances, to give me peace of mind.” 

• ‍Who It’s Good For: If you have a good relationship with your parents and they were relatively open about money matters while you were growing up.

• You don't necessarily have to ask them to tell you everything at once. Instead, you could start by asking about particular aspects of their finances

The Estate Planning Door-Opener: “I just got my estate planning documents together - a will, power of attorney. Have you done that yet? Could I help set you up with an attorney?” This often leads to other conversations about finances, and can serve as a “soft-starter” for.  

The Inquiry vs. Advocacy: “"Mom and Dad, have you given much thought to what your retirement will be like? I want to help you be as independent as possible for as long as possible. I’m wondering if you ever think about the future and how to plan for a time when you may need more care.”

• Who It’s good for: The self-starter parents.

• Ask your parents about their wishes. The point is to show them you're concerned about being able to uphold those wishes, whether it's the type of care they would want later in life, end-of-life care, or their final wishes. For example, you could say, "Mom and Dad, you took such good care of me when I was younger. I want to be able to provide that same sort of care if you ever need it." 

The Helper: “I’m wondering about how we will pay for care. I’d be happy to help you manage some of the paperwork and financial matters. Would a bit of help with a few things ease your stress?” 

• Who it’s Good For: The “acts of service” love language parents.
• You can gain insight into your parents' finances by offering to take over a financial task for them so they have more time to do what they enjoy. This is a good strategy to use if you haven't had any money talks with your parents and they already are showing signs that they're having trouble managing their finances on their own.
• You could start small by suggesting that you help them set up automatic bill payments. They might not even use their bank's website, so this would give you a chance to create an online account for them, and to keep tabs on their account going forward. Or you could offer to tackle one of the most universally dreaded financial tasks for them – tax preparation. You don't necessarily have to prepare their tax return for them. Instead, you could help them gather their documents and take them to an accountant to prepare their return. In the process, though, you'll get details of their finances that you'll need if you ever have to manage all money matters for them.

The Invitation: “I wonder if we could we sit down to have a conversation about your finances and future” - sending this via an email or a letter in advance.

• Who it’s good for: More traditional parents who might want some time to process their emotions and have a sense of control. 
• It might seem old-fashioned to send your parents an invitation to talk, but it can be a polite gesture that an older generation will appreciate. And it's more likely to result in a productive conversation. "It's really helpful to let your parents know you want to have this conversation in writing rather than catch them in the moment when they have to give you an immediate response," said financial psychologist Mary Gresham. "The immediate response is going to be more emotional. If you write to them and say, 'I want to invite you to have this talk with me,' that gives them time to work through their emotions."
• Explain in your letter what you want to discuss. And let your parents know that you're inviting them to have this conversation out of love – your love and desire to be able to help them as they age and their love and willingness to share information with you so you can help them if they need it.
• The benefit of an invitation is that it lets your parents maintain a sense of control. "An invitation is different from a demand or a request," Gresham said. "People process the word 'invitation' differently." You are asking kindly to have a conversation but giving them the option to decide whether to accept your invitation. And you can let them decide when and where to meet to have the conversation by asking parents to share a vision of what will make it work for them, Gresham said. "If they say, 'Never,' you can always say, 'That doesn't work for me,'" she said.

The Current Events: “With all the craziness in the stock market, we’ve been looking a lot at our own financial planning. Has what’s been going on shifted how you’re thinking about retirement?”

• When financial topics are in the news – changes to the tax law, big swings in the stock market, health care reform, the list goes on – use that as a launching point for a conversation about your parents' finances.

The Share a Story: A family member’s passing or retirement can serve as a springboard for your talking about your own parents’ retirement. 

Step 3 - Figure out how best to support them 

There’s no one “right” way to financially support your loved ones. The best method for you and your family will depend on their present and future needs and your available resources. Here are the four main options to consider, along with pros and cons.   You’ll note we specifically avoid loans here.  Note - I’ve specifically left off loans here. From personal (and professional) experience, I’ve found it’s often best to structure payments to loved ones as gifts instead of loans. Approaching it from this vantage point helps you only give money you don’t expect to get back. It also takes the pressure off your loved ones, who don’t have to stress about paying you back either. Also, be cautious about co-signing any loans for family members since you will be responsible for paying that money back if they cannot make a payment. 

Lump sum payments

Give your parents one large, lump sum of money for them to spend as they see fit for the rest of their lives.

Pros:

• One and done.
• Parents are responsible for the money; it gives them a sense of autonomy.
• Easiest method.

Cons:

• You have no control over how they spend/use the funds. For example, they could spend it all before they hit 80 or keep it all in cash instead of investing it.
• Gift tax. Married couples are allowed to gift up to $64K to another married couple without triggering the gift tax. So if you want to give your parents more than the threshold, you’re going to have to pay a gift tax.

Monthly gifting

Send a certain amount of money to your family on a recurring basis. As your parents age, they could use that money to support themselves throughout retirement or whatever expenses they see fit.  A recent AARP research study found that most adult children give money to families on a monthly basis

This could also be gifts “in-kind” - bringing your parents to live with you for free.

Pros:

• Easy to do.
• Gives parents independence and a sense of autonomy.
• Less management on your end, but more control than one singular lump sum payment.

Cons:

• Lack of protection from misuse and/or malicious parties. This can be mitigated by increasing the gift frequency and spreading out the distribution. 

Direct payments for large expenses

Paying for specific expenses, like groceries, housing, health care, personal items, or utilities. Others want to add their parents to a cell phone, internet, cable, or subscription plan (Amazon Prime! Netflix!). Assuming responsibility for some bills goes a long way toward providing meaningful financial support. 

Pros:

• Can be automated. This makes it easy for you and for them!
• You’ll know exactly what money is used for. No funny business here.
• You have control over the situation and don’t run the risk of malicious parties or scammers targeting your parents.

Cons:

• Extra work for you… Do you have time to be keeping track of this?
• It’s like running another household. A huge responsibility.
• What happens if the light bill payment doesn’t go through for some reason? You’ll be responsible for any mistakes and your parents won’t be happy if they happen.

Revocable living trust

This is the most protective method. It involves setting up a trust that you fund and appointing someone (a trustee) to oversee the distribution of funds to your parents. 

Pros:

• Most control of all the methods.
• You set the rules, but also have the flexibility to change rules if you need to.
• Protection from misuse and fraud.
• You’ll have a third party (the trustee) to help serve as the middleman in case any complex or awkward situations arise.

Cons:

• You’ll be faced with a set up expense for setting up the trust and a planning expense for all the planning that goes into it.
• You will have to pay ongoing maintenance fees for the trust.
• While an extra middleman can be helpful in certain situations, they can also make things worse sometimes. You’ll always have to go through the middleman to make changes and to get the money to your parents.

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Note: for the lump sum, annual/monthly gifts, and living trust options, explore “upstream gifting” which is gifting appreciated securities instead of cash, if your parents are already retired and face lower capital gains tax (aka in a lower tax bracket).

• This technique involves making gifts of appreciated assets up the family tree to your parents. So instead of giving money, you’re giving your parents appreciated stock (plain talk: stocks that you bought at a low price that are now being sold for a higher price).

Pros:

• Tax savings. Your parents likely have a much lower capital gains tax bracket than you, so they’ll pay less taxes than you would have had to on those assets. The payouts from these appreciated assets are usually qualified dividends, on which you personally might owe 15% - 20% in taxes. But for your parents, if they have up to $80K in 2020 taxable income on a joint filing, these payouts fall into a 0% tax rate, effectively removing any tax on all prior appreciation.

Cons:

• The hassle factor. It can be a bit of a pain to do this method, especially for the parents. They will need to sell the stock to use the funds and how much they get out of it depends on their capital gains tax bracket.

• Checkout this article by Capstone to learn more about upstream gifting and how it can give you a major tax break on your appreciated assets.

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How To Financially Prepare

If financially supporting your loved ones is a crucial money goal, you’ll need to prepare for it. Knowing how you want to help gives us a springboard for creating a plan to make it happen. 

An excellent option to consider is establishing a “family brokerage account.”

Select whatever financial platform you like (Betterment, Vanguard, etc.) and open a new account solely dedicated to supporting your family but in your own name. This can be an ideal solution because you’re not taking funds away from other goals—retirement, kid’s college, etc. Instead, it’s a separate account dedicated to this specific purpose. 

When there’s money in the account, great, you have the option to decide if and how you want to help. If there are limited funds, you may need to be more careful about the money you give. Setting it up this way creates natural boundaries and ensures that you aren’t jeopardizing your own financial needs. 

Depending on your other financial commitments, we’ll determine how much makes sense for you to contribute to the account each month. Since it’s an investment account, you’ll set yourself up to see greater returns than if you stored the money in a savings account. 

With the money in a separate account, you’re able to use it as you see fit. Perhaps you’ll withdraw money to help your parents with a costly surgery or other medical expenses. Or, you may want to help them with rent for a little bit if they struggle with making payments. 

A brokerage account could support one-time or recurring payments. Here, you have SO much flexibility. If they don’t need any funds for a given time, that’s okay; your money simply takes advantage of compounding interest. This arrangement offers peace of mind that you’re able to help your family when needed but that you’re not establishing a pattern of giving money.

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Helpful Resources:

Trying to figure out a good estate planning lawyer? This is a spot where having someone in your parents’ state matters. Different states have different laws in this space. They’ll want a local expert. Ask for referrals from lawyer friends in your parents’ state on what estate planning lawyer they or others at their firm use. 

We highly recommend signing your parents up for a one-time financial plan. This is what I used for my in-laws, and it was great! Rick Ferri is a great financial planner who specializes in these types of one-time plans. This will allow your parents to go over their assets in depth and then will give you a better picture of how you can best assist them.

Andy Panko is another good financial planner that I’ll highlight. He specializes in retirement taxes, and if that’s where your parents are struggling, I recommend you check him out!

The National Association of Personal Financial Advisors, known as NAPFA, is a good database to find a financial planner, but make sure you strictly search for fee-only planners, as the others may take ridiculous percentages and may not have your best interest.

The XYPN Planning Network on Facebook is also a cool group to check out. It’s like Yelp for financial planning and very easy to join. You can send a message in the group asking for recommended financial planners or answers to a burning question on your mind.

And lastly, we can help you too! Bringing in a third party makes things less awkward. Steward ‘s mission is opening up the 1%’s wealth strategies to America’s up-and-coming families with a combination of 21st century tech and trusted advisors. We help families determine how, where, and when to invest and save in plain-English, with minimal time and effort. Steward may not be able to help your parents with their financial plan, but we can help you and your partner determine the best way to help them financially and how much you can afford to contribute without ruining your retirement plans. Give it a try here.