A local study conducted in 2021 estimated that the first 18 years of a child’s life will cumulatively cost about $266,000, or about $14,700 per year. And those figures exclude the inflation we have seen over the last two years.
My mother used to joke that she had four children and her sister, who chose not to have children, had four houses — so it seems to me she had the maths about right!
For those of us who have been fortunate enough to raise children, there are probably no surprises here.
However, the question is, when is it reasonable for the Bank of Mum and Dad (BOMAD) to withdraw support?
The parent trap
We love our kids and, if we are fortunate to have sufficient financial resources, it is incredibly difficult to not provide our children with the funds and opportunities that we think could make a difference in their life.
A recent study from the United States suggested that 70% of parents with children 18 years or older say they have sacrificed their own finances to help their offspring — some even draining their retirement funds to do so.
Anecdotally, the experience within my client base is that the number acting as BOMAD, while not as high as 70%, is still a significant number and it appears to be growing.
Seldom solved by money alone
While there are crisis situations where financial support is needed, providing funds in other situations can negate a learning opportunity. At its worst, it can skew career decisions by supporting choices that don’t make economic sense. In a more modest form, it just means that we have taken helicopter parenting into the economic realm.
The property ladder
In recent years it would seem that FOMO (fear of missing out) has driven increasing calls on the BOMAD to help with the purchase of property. The irony is that these advances have caused recent buyers to be exposed to contracting property prices.
The official banking system and the IRD are also coming into play here. In the past the official banking institutions were comfortable for BOMAD to loan money to their children (often with nominal or no interest being charged).
However, with property prices being less certain, banks are now insisting that these payments are made as outright gifts rather than loans. This can be problematic if a relationship ends, and the property is subsequently subject to a claim under the Property Relationship Act.
This is a legal area beyond my expertise but suffice to say that legal advice should be sought before any arrangements are entered into. Similarly, the ownership arrangements may create a situation where the property’s future sale may be subject to the bright-line test and the sale proceeds taxable. Once again specialist tax advice should be sought.
But there is a flip side to this discussion. As one client put it to me, I would prefer to give warm hugs than a cold handshake from the grave. Being able to advance some capital to your children when they are of an age where it can make life a little easier, can be immensely emotionally rewarding.
From my observation, an individual’s approach to money is pretty well set by the time they reach thirty. A significant gift beyond this age is unlikely to distort their money values.
If you find yourself being asked to assume the role of BOMAD then it is worth considering the following.
1. With the assistance of an investment adviser, you should do some modelling to ensure your generous tendencies are not going to jeopardise your future quality of life.
2. Most people underestimate their life expectancy. Today a 65-year-old female will on average live to 88.
3. Seek legal and tax advice about the risks and possible implications of the structure you are using.
4. Ask yourself whether making an advance or gift is really in the child’s best interests. Is it likely to distort their money values?
5. Be very very cautious if you are ever asked to act as a guarantor for a loan. It may appear to be a low-risk activity when the guarantee is provided but things change over time. Legal advice is absolutely required in these circumstances. And remember, the commercial bank is never as nice as BOMAD.
6. Keep the wider family informed. There is nothing quite as corrosive within a family as feelings of injustice between siblings.
7. Don’t expect gratitude. It should be enough that it gives you joy.
From my observation it takes a lot of wisdom, and a measure of good luck, to raise independent children.
The Bank of Mum and Dad may have a role to play in this process, but it does need to ensure that it is acting as a responsible lender.
■Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
