Most parents we work with really do love their children. However, sometimes parents are faced with an interesting dilemma. Should we loan our children money, or shouldn’t we? I could
probably stop this blog right here and listen to some of your opinions on that question! Every situation is different, and there certainly have been enough times where it has been the right thing to do. On the other hand, there are certainly warning signs about dealing with finances within the family.
Plenty of farm families have helped their children over the years in a variety of different ways. Some parents have bought vehicles and helped with college. Others have helped with the purchase of a home or some land. I have observed some help non-farming children with business ventures outside of agriculture. Some have helped children through divorces and bad credit. As you go through that list, it is probably fairly easy to judge where you personally would and would not help. For some parents, financial assistance is considered a gift and they expect nothing in return. However, in other situations, there is clearly an expected return.
So, here’s how it often works when I gather the basic information during our Fact Finder meetings. The farm information is easy enough to talk about, but then somewhere toward the tail end of the appointment, “it” comes up. They change their tone of voice and usually sit forward a little more and say something like this, “We’ve got this ‘little situation’ where we loaned our child $50,000 about eight years ago, and they’ve never really even attempted to pay us back. What should we do?”
I am thinking “oh dear, here ‘it’ is again”. They will soon be asking me to offer an opinion on the “little situation” that is causing some irritation. So here it comes as they ask either “what would you do?” or “what do other people do?”
Again, I should stop and ask you, the readers, “what would you do?”
Well, some have responded by simply giving the other children the same amount of money. That’s possible in some situations, but often it is not. There simply may not be enough cash to go around. But for now let’s say it was possible. Are any lessons being taught?
I cannot help but think of a family out west that I work with and this father has repeatedly assisted one of his children and complains each time. Do you see a contradiction right there? Anyhow, now the child is going through a divorce and bankruptcy, and one more time, Dad will be there with the checkbook.
I shake my head because the way I see it, that child never learned because they never had to.
Maybe we should back up the horses and clarify. As parents who loan or gift assets, if you expect repayment, that should be clearly defined from the start. That way your “solution” does not require giving more to the other children just so that one does not have to repay.
So, let’s say you have clarified that repayment of a loan is expected, what if “it” is still unpaid at your death?
Several years ago, I met a fine gentleman who had assumed the responsibility of repaying one of his children’s loans. The banker had even conveniently attached some of the farmer’s land to the loan. As the facts were being gathered the farmer leaned forward and said to me, “I plan to use my Will to give that child… one last spanking.”
The moment those words came out of his mouth, I smiled and said to myself, “I am going to use that line in the future to tell a story.” There are many lessons in life to be learned. One of the
basic lessons in life should be the responsibility associated with borrowing money. I believe it is a fundamental mistake that many parents make with children when money is loaned to them without learning the responsibility to repay.
Now, I’m not talking about a gifting or equalization strategy that you may have with your children or different ways that you can help your children out at various times. But if you go above and beyond a gift and you expect repayment, I would suggest clarifying the terms and expectations going into the situation so that your child knows what you expect. Miscommunication upfront only leads to bigger conflicts down the road. So, start by clearly communicating your expectations. However, if expectations are clear, and yet ignored by your child, then you may have to include “one last spanking” in your legal documents.