Stern Advice-Want to help the kids? Be tactful and strategic

NEW YORK Wed Feb 12, 2014 12:08pm EST

NEW YORK Feb 12 (Reuters) - Bill Cosby, speaking as the obstetrician Heathcliff Huxtable on his 1980s eponymous television show, once told his sitcom child: "Your mother and I are rich. You have nothing."

Judging from comments made by financial advisers and their clients, a lot of people probably wish they could say that, especially to their adult children.

Most people - almost 60 percent - do help them, even after the kids are done with school, according to a 2011 study from the National Endowment for Financial Education. Many do so at the expense of their own retirement security, according to November 2013 findings from Merrill Lynch.

That's an obvious no-no: It doesn't make sense to leave yourself vulnerable in old age to support your grown child. But once you go beyond that point, it's hard to know where and how to draw the line on helping your kids.

Some young adults hit their parents up for everything from costly sports cars to the latest 'iDevice' and show no appreciation, says Mari Adam, a financial adviser in affluent Boca Raton, Florida.

Others go the opposite way - spurning all aid from their parents as an implied criticism that they can't make it on their own.

There are two kinds of parents, too, says Todd Morgan of Bel Air investment Advisors in Los Angeles.

"There are those who are very generous and want to help kids while they are still alive. I put myself in that category. Then there is another group that says 'I want you to make it on your own. I'm here for emergencies, but don't count on me right now.'"

Whichever group you are in, the key to helping your kids the right amount and doing it the right way is in communicating carefully. Figure out what you can reasonably afford to contribute and what your philosophy of child-helping is. Explain the feelings behind it.

"My parents were always there for me, and I want to do the same for you" or "I know you will muddle through, and we have your back if times get very tough" - or whatever best expresses how you view intergenerational gifts.

Here are some other ways to optimize those gifts.

HELP BUT DON'T ENABLE DEPENDENCE

That's a distinction that Adam makes with her clients. Assisting with medical bills or pitching in during a time of unemployment is one thing.

"But supporting a lifestyle they cannot pay for themselves goes in a whole other category - that's enabling."

BE STRATEGIC ABOUT HOUSING

As Abraham Maslow documented, shelter is a primary need. But parents who want to assist their children with that need should be careful. A move up house isn't a primary need. Adam has seen clients provide down payments for houses their kids can't afford to keep up - that's a recipe for disaster.

If your kids want to buy a house they can afford to keep up, then down payment aid is a sensible way to help.

The other ways - buying a house with them or giving them your old house - is fraught with tax consequences and other complications.

If you hand your kids a house, that can push you into gift tax territory. If you buy a house together, with the idea that your kids will eventually own all of it, you can find yourself unable to extract your equity when you need it for retirement. Or find yourself holding the bag if your child falls on hard times and can't make payments.

LET UNCLE SAM HELP

There are many ways to share property and income across generations that allow families to save on taxes.

For example, parents can give their low-earning adult offspring shares of an appreciated stock or mutual fund and perhaps avoid paying capital gains taxes altogether.

(For 2014, a single person earning under $36,900 and a couple earning under $73,800 is in the 15 percent marginal tax bracket and that means their capital gains tax rate is zero. A parent could give appreciated shares to adult children who fit within those limits and the child could sell the shares and pocket the proceeds.)

There are other ways to use the tax code to help your kids. When they've got starter jobs, make contributions to their Roth individual retirement accounts for them. Skip a generation and start feeding 529 plans for the grandchildren.

INCENTIVES TO REWARD BEHAVIOR

If you want to encourage your kids to save, pretend you are running a family 401(k) and set up a plan for matching the savings that your kids do. Or help them to work. You can pay for training courses or help with graduate school or childcare, so they can build careers in a tough economy.

JUST SAY NO

If you can't afford to help, don't. Instead offer non-financial aid: baby sit, help with home repairs or cooking, so they can work, teach them how to do their own home repairs or cooking. That's support, and a good way to transfer skills from one generation to the next.

Even if you can afford to help, don't overdo it.

Morgan has seen the downside of handing off huge windfalls.

"Sometimes families pass on millions of dollars to kids before they are ready," he says. "I've seen adult children go out and buy planes, boats, Ferraris, houses, multiple houses. Usually the houses and the Ferraris get sold within a couple of years."