Help Young Adults Move Out of Your Checkbook

From a financial perspective, it's not when your adult children move out of the house that matters. It's when they move out of your checkbook that really counts.

Helping your adult children reach this milestone typically depends on factors ranging from family expectations to legal requirements.

Legal rules

Parents' legal responsibility for supporting their children financially typically ends when the child achieves the age of majority in his or her state of residence.

In many states, that means the adult child is legally responsible for debts and living expenses at age 18. Some states, including California, make an exception for children who still are in high school when they reach age 18. These states require the parent to continue providing support until the child either graduates or reaches age 19.

Many parents voluntarily extend their financial responsibility past age 18 as part of divorce settlements, or by co-signing for rental leases, loans, and credit cards.

Lyle W. Johnson, an attorney with an emphasis in family law in San Jose, Calif., advises his clients to avoid these contractual obligations, which can force you to pay a settlement allowance or cover an adult child's unpaid debt regardless of your own financial circumstances.

Co-sign with extreme caution

The parent of eight adult children, Johnson never co-signs loans or leases.

"Once your child is 18, then you want to avoid any legal obligation to provide support or payments for them," Johnson says. "That doesn't mean you don't help them. But there's a big difference between your child coming to you and asking for $500 a month to go to school and the court telling you to pay $500 a month on their behalf."

When adult children seek help to get a loan or rent an apartment, Johnson encourages parents to provide a specific amount up front instead of co-signing, since lenders and landlords often waive co-signature requirements in exchange for a higher down payment or deposit.

If you do decide to co-sign for your children, know what your responsibilities are. When you co-sign, you become legally responsible for repayment of the debt.

As a co-signer on a loan or credit card application, you're lending your good name and your solid credit history. You also make a promise to repay in full if the original borrower can't, doesn't, or just plain won't.

Vehicle insurance

Vehicle owners are required to carry insurance, so make sure to pay the insurance on any vehicle that still is in your name.

Johnson advises parents to transfer vehicles to the adult child's name to limit liability if an accident occurs. You still can be liable, however, if you help an adult child buy a car despite knowing about issues that may impair driving, such as alcohol or other substance abuse.

The Insurance Information Institute, New York, suggests purchasing an umbrella liability policy to cover these situations and offers information about insurance requirements.

Health insurance

Many health insurance plans allow parents or guardians to use family coverage to protect adult children who are in school, usually at a lower cost than individual coverage.

In the past, rules for "dependents" dropped most young adults from employer-based health policies at either age 19 or when they graduated from either high school or college.

The Affordable Care Act passed in early 2010 extends dependent eligibility for health insurance to young adults until age 26, regardless of their tax, student, or marital status, according to the U.S. Labor Department (DOL). A DOL fact sheet offers details about eligibility and tax credits for parents.

Many states already had similar rules, according to the National Conference of State Legislatures. Employers who offer "self-funded" health plans are excluded from state requirements; check with your employer or health plan administrator to learn more.

Taxes

Tax status can be a touchy issue with young adults, who often get a bigger tax refund if their parents don't claim them as dependents.

Internal Revenue Service (IRS) guidelines state that parents can continue to claim young adults as dependents until age 19. That is extended to age 24 if the young adult:

Attends school full time; Shares the parents' principal residence; and Receives at least half his or her annual support from parents.

Some parents make claiming the child as a dependent a condition of financial support to avoid conflicts when filing returns.

Adjusting expectations

Experts advise parents to spell out exactly what they will pay for, as well as the type of expenses that the adult child must cover. While rejecting a request for help is difficult, it often leads to a better understanding of financial obligations.

"As a parent, you have to be responsible enough to know when to say no, which isn't always easy," Johnson says.

Written agreements define 'rescue' limits

There's a thin line between letting adult children learn from experience and letting them drown, according to Dr. Kenneth Kaye, a psychologist who has worked with families for 30 years.

Kaye and his son, Nick, share their personal experience as co-authors of "Trust Me: Helping Our Young Adults Financially."

When rescues are required, Kaye recommends using a written agreement to record the specifics of any gift or loan, especially if the child's personal choices will affect it.

"Covering discretionary matters like vacations, nicer housing, new vehicles instead of used, and paying off credit cards�those kinds of things tend to perpetuate spending problems if not done with careful thought and an explicit, written 'deal,' " Kaye says.

Helping with 'necessities'

Annabelle and David worried when their youngest son, Brandon, moved out and got a loan to buy a $24,000 car and a $6,000 motorcycle.

Then Brandon lost his job and let his health insurance lapse. He found a new job, but needed an appendectomy during the waiting period to qualify for the new employer's health plan.

Now Brandon makes payments on $16,000 in health bills while Annabelle and David help by:

Inviting Brandon to dinner and sending him home with a bag of groceries; Paying him to repair their vehicles; Patching Brandon's blue jeans and buying him an occasional new shirt; and Making payments on Brandon's student loans until his health debt is paid.

Annabelle and David sympathize with Brandon's tight budget, but they resist the temptation to "fix" his finances.

"We don't pay for things that aren't a necessity," Annabelle says. "If kids are going to learn to be on their own, they've got to find out what it's like."

Published October 18, 2010