How does the parent answer the call for financial assistance when it comes from an adult child? When we are raising our children we are asked on a regular basis for five dollars or ten dollars. But what if the request is in the hundreds or thousands? How can you assist your child without eroding or risking your own financial position?

There are several ways to accomplish this goal. Each of them has its own advantages and disadvantages, its own benefits and pitfalls. However, if a parent makes a decision based on his or her individual circumstances and keeps an eye on the future and all possible outcomes, a child can be assisted without undue prejudice and risk to a parent.

GIFT

The first and most obvious way to assist a child in financial need is simply to give the money as a gift. This can be done through all of the normal methods: cash, cheques, money order, bank transfer, signing over a GIC or similar instrument, and so on. This can, however, create the dangerous precedent of the parent as "money pit" - a source of income to be tapped by a child whenever things get "tight". Sibling equality may also be an issue. Furthermore, with a married child, an undocumented or an improperly documented gift could be seen by a divorce court as a gift to both spouses and part of the matrimonial property to be divided in the event of a divorce. Or, if your child puts the gift into a joint asset (i.e.: down payment on a house put into joint names), a portion of that asset becomes matrimonial property and therefore divisible. Gifts are not as simple as they initially appear.

CO-SIGNING LOAN APPLICATION

Other options include co-signing a loan with a child who had not yet established credit. But again, your assets are at risk should your child be unable to repay the loan. It is important to look at all of the financial options from all points of view.

LOAN - SECURED

If you want the money paid back, you become a "banker". You can properly document the loan to the child evidencing your intention that the funds be repaid. Like any banker, you must assess the risk that your child will not repay the money.

Another issue to address is whether or not you want the loan secured or unsecured. A secured loan occurs when a lender loans money and receives "security" back. The best example is a house. You loan your child funds to purchase a home, your child grants you an interest in the home by way of a mortgage which is secured against the property purchased, and should your child ever sell the property in the future, you would discharge your secured interest by discharging the mortgage when you have been repaid. If the child defaults in making the payments, you can proceed with a foreclosure in order to obtain the funds you lent, just like a bank would. Ultimately, the property might be sold through the court process to repay the mortgage and other costs.

Taking security from your child is obviously a difficult thing should you have to take enforcement steps to obtain your money. However, it is a very useful way to protect your position, particularly when your child has other creditors. If your security is properly drafted and registered where needed, you may have a "priority" position against other creditors if your child has serious financial difficulties and other creditors are moving in. Mortgages can be demand mortgages, requiring no ongoing payments to be made except on demand, when the full amount becomes due and owing.

The cost involves the land titles cost of registering the mortgage and a lawyer's fees in preparing and registering the mortgage. The final consideration is that even if you are a secured creditor with a mortgage on title, your mortgage may be second in line behind a first mortgage of the bank who lent the bulk of the money to purchase the home.

LOAN - UNSECURED

An unsecured loan is where money has been loaned but no security has been taken. Perhaps the only evidence of the loan is a promissory note or a verbal agreement as between parent and child. This is fraught with risk to the parent. Secured creditors will invariably defeat unsecured creditors in and out of the bankruptcy process and there is simply no way to ensure that you can recover loaned money. If no security is taken and your child then encounters financial problems, your debt will rank with all other unsecured creditors. Your child cannot repay your loan to the detriment of or in preference to other creditors. In a bankruptcy situation, the bankrupt party has no ability to direct where what little assets he or she has are to be paid and how they are to be used to pay off creditors.

Having said that, an unsecured loan is quick, easy and cheap. It can be done with or without documents.

If you really want to loan money to someone and have a reasonable chance of having it paid back, ensure that you take security, register a mortgage or similar instrument and prepare proper paperwork: in other words, see a lawyer. Your future is too important and you can certainly explain to your child that it is not him or her that you are worried about, it is the other creditors. It may also be a factor for you to consider the length of time required by the child to repay the loan. It may be that your circumstances are such that you are financially secure in the present but would require the income (i.e.: interest payments) or repayment in the future.

There are methods of loaning money that are more complex, such as a loan from a parent's RRSP, a loan from a family-held corporation, a loan from a family trust or income splitting arrangements. They are options, but should not even be considered without first seeking appropriate advice.

CO-OWNERSHIP

Co-ownership is another method that can be used to secure your loan. You will have to assess very carefully if you and your child want this type of arrangement. If the house was sold there could be a potential capital gain to the parents if the property has increased in value. As this was not the parent's principal residence but the child's there is no personal exemption for a residence for the parents. You are a joint owner with the child and as long as you get along and trust each other, this can work very well. However, disputes can arise. One of you may wish to sell his or her interest in the property. It is crucial that you seek estate planning advice and, again, document the arrangement appropriately. You would also have to decide whether or not you wanted a co-ownership agreement or a buy-sell agreement in the event there was a death or dispute.

ESTATE ADVANCES

Estate advances are a form of gift. They are monies that would otherwise be inherited by your child when you pass away. Like gifts, they deplete your resources, are not paid back and could give rise to battles amongst children. If you are comfortable and secure in the amount of funds you have for the remainder of your life, you may want to provide an estate advance to your children in order to see them enjoy and use the funds now as opposed to on your death. If an estate advance is given to only one child, it is important that it be documented so that an adjustment is made in favour of your other children at the time of your death. This may involve an amendment to your Will. If your child divorces, an estate advance is treated as a gift: it remains the property of your child. However, if it increases in value, the increase in value will be shared between the spouses. Again, if it is put into a joint asset or cannot be traced into an asset, the untraceable portion and part of the joint asset value will be divided among the divorcing spouses.

COSTS TO THE PARENT

You must assess the costs to you and your financial position of loaning funds to children. What will the costs be to you if you withdrew out of investments to lend money to a child? You must assess the income you will have lost by cashing in this investment. You may have a resulting income tax liability if it is property that has increased in value. Also, in charging interest to your child on a loan, the interest earned would be included in your income and likely will have tax consequences to yourself. If you must borrow funds yourself to provide to your children, there will be the costs of borrowing the funds: the interest you will pay is not deductible when calculating your income tax. If a child is unable to repay the loan and no interest has been charged, you lose all interest income and also, you would not have a capital loss for tax purposes.

Other considerations are whether or not it is an issue with you as to what the child requires the funds for. In some circumstances, it is about more than just money and there may be deeper issues of lifestyle, priorities, goals and values that may differ from your own.

All of these methods of helping children financially have one key effect in common: the depletion of your resources. You must review your situation very carefully before considering loans, gifts or any other arrangement discussed in this article. What are the tax consequences? What will the housing market do? Do you have the money? Do you have to cash in RRSPs and if so, how much tax will you have to pay? Do you have income to replace the money you have advanced? What is your position if the money was not repaid or not repaid for a long time? Will interest on the loan help you?

With any important financial decision it is essential to seek qualified professional advice. Speak frankly with your financial advisor. Talk to an accountant. Get legal advice and document all arrangements thoroughly and properly.

The pressures on young adults these days spill over onto parents. Jobs are sometimes hard to find: setting up a home is filled with unforeseen expenses, cars are costly and student loan debt levels are very high. University and college education is more expensive than ever before. You can help, but consider all the factors and get advice from a professional. You have only yourself to save and that is pretty important.