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Key Takeaways
- Know how much you can afford to give without harming your own finances.
- Decide thoughtfully between a loan and a gift, considering tax rules, repayment expectations, and family dynamics.
- Set clear provisions and expectations before providing support
- Define limits and conditions for ongoing help.
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A client’s family members may periodically need financial assistance. Children have mishaps when launching into adulthood, parents or siblings may fall on hard times, or friends may reach out for a hand. How can your clients help their loved ones without being taken advantage of or harming their own finances?
What I’m Telling My Clients
Understanding Your Own Finances
The first step is understanding how much assistance you should, and realistically, can provide. Do you have sufficient cash flow to cover your own unexpected expenses if they arise and help a family member in need?
From there, you can develop a financial plan that supports both your stability and your desire to help.
Important
Revisit your financial plan yearly with your financial advisor to keep all the numbers up to date. This way, when an unexpected event occurs, you aren’t scrambling to know what you can or can’t afford.
Deciding the Form of Financial Support
Once you have decided you are in a position to help out, decide whether to provide help in the form of a loan or a gift. Considerations include the amount of support you will provide, how long the support will be needed, and how this may affect dynamics with other family members, such as siblings.
Gifts are a clean way to help someone, as there is no expectation of repayment. For tax year 2026, gifts exceeding $19,000 are subject to additional gift tax rules. In this case, it may be beneficial to structure the gift as a loan forgiven over time.
Loans to family members come with more baggage, as you will need to keep up with the loan provisions and should claim interest on the loan on your tax return. Additionally, if the loan is not repaid, it may damage your relationship.
Setting Provisions
In advance of making a loan or gift, discuss with the recipient the specific provisions of the arrangement and your plan for any future gifts or loans. If your ability to provide future gifts could impair your financial stability, communicate that you may not be able to continue providing support. This helps set clear expectations and can reduce family friction.
If the recipient needs ongoing support, create “engagement standards” that outline the conditions for continued assistance. These should specify how long the support will last, how much will be provided, and what the recipient must do to receive ongoing help. For example, if you are supporting a young adult who is out of work, you might require them to prepare a budget and share details of their job search efforts.
If the support becomes chronic and the recipient is not making progress in improving their situation, consider financial therapy. Keep in mind that if you die or become unable to provide support, that family member may no longer have a safety net or the skills necessary to succeed independently.
The Bottom Line
Providing financial support for loved ones has financial and emotional repercussions. Helping clients plan for gifting, structure gifts appropriately, and set expectations between the client and recipient can mitigate family strife and ensure ongoing financial security for both the client and recipient.
