Boomerang Kids: How to Avoid Getting Financially Whacked When Your Adult Child Returns Home

June 20, 2012

It’s been said that a parent’s greatest gifts to a child are roots and wings. But what happens when a child must return to his roots because he cannot fly? This is the situation faced by many parents today: their adult children are moving back home, unable to find jobs or to afford life on their own.

What’s a parent to do? Barring the door seems inhuman, if not positively unparental. After all, it’s not the child’s fault that employment prospects for young adults, even college graduates, are so dismal. At the same time, many parents count on the years of empty nesting as their last chance to beef up their retirement savings or make progress on other deferred financial goals.

The challenge is to make this a win-win situation, both for parents and returning kids, as opposed to kids-win, parents-lose. Theoretically, the more people in a single household to share fixed overhead and maintenance tasks, the better. But too often kids get a free ride at the parent’s expense.

Your very first step as a parent, after categorically refusing to do your kid’s laundry, is to consult with a CFP® professional to get a good understanding of your baseline household expenses, both before and after your child moves back home. This analysis can be shared with your child, or better still, he or she could be part of the discussion with the financial advisor. This has the advantage of keeping the discussion objective and factual and out of the former parent-child conflict zone that was likely established when your young adult was a resident (and reticent) teenager.

Consider the expenses that likely will increase – such as utilities, food, household supplies, car maintenance and depreciation – and use these to set a reasonable rent for your child. If he or she has absolutely no resources for rent, then find ways that his or her participation can reduce other regular expenses of running the household. Are you and your spouse working long hours, and so rely on the convenience of having groceries delivered? Do you use other household services, such as lawn care or cleaning? Is your restaurant budget high because you don’t have time or interest in meal planning or cooking? You can create your very own deficit-free stimulus program for your new household economy by bringing these jobs back home and putting your child to work.
Create a written contract with your child. You might welcome her home with a big hug but still take an arm’s length business approach to her return. Be specific as to your expectations for shared expenses and household responsibilities.
Don’t forget to set term limits on your child’s residency. You can always extend them, if this makes sense, but it is difficult to enforce limits where there are none.
Consider other quid-pro-quo requirements for your contract. For example, you might agree that your young adult is welcome to live at home as long as there is evidence of a good-faith effort to search for a job. (After all, this is the way unemployment benefits work.)
Be sure to include default clauses and penalties if the contract is broken.
Finally, if your parental support involves lending money to the child, then put the terms of this loan in writing as well. Otherwise, the money can easily be seen and treated – by parent and by child – as a gift. The IRS will also see it as a gift, and possibly as a taxable one, if the amount given to the child is over the annual $13,000 per donee gift exemption.

The idea is not to trade your welcome mat for an alligator-infested moat, but to allow your kids to live and be treated as responsible adults. When an adult child needs assistance, as so many do in the current environment, parents are inevitably the first to extend a helping hand, having had years of loving practice in this capacity. But if taking care of your kids now means your kids having to take care of you later because your own financial planning gets put on hold, then you have to ask if your parental support has done more harm than good.