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Neither a borrower or a lender be?????

“Mom and Dad, can you lend me some money?”

 How often have we heard that question and know that “lend” translates to “give.” Just last week my darling daughter went over her spending limit at the J.Crew sale.  If I lent her some money she could get the perfect-for-fall sweater. She’d pay me back, she promised.  She got the sweater and I’ll never get the money.   The $50 is not going to break the bank, and she looked pretty in persimmon.

Suppose though “Can you lend me some money?” means $10,000 or $50,000 or $2 million, as in the case of Nathan Deal, the Georgia gubernatorial candidate.  What’s the response then?  What’s the response when you have several children and lending money to one (you know it’s not going to stay secret) causes resentment and/or brings similar requests from the others?

Many adult children are not even aware of the state of their parents’ finances, according to a recent survey in Consumer Reports.org.  Only about 42 percent knew their parents’ income and fewer than half even recalled having a discussion about income and expenses.  

Nonetheless that doesn’t stop many adult children from asking as in the case of the Deals who lent their adult daughter and her husband the money to open a sporting goods store that eventually failed. The Deals were just doing what all parents do: helping their children.  Now the daughter and son-in-law have filed for bankruptcy and the Deals are trying to avoid the same. 

The sad saga was chronicled in a New York Times money blog “Underwriting a Child’s Business Poses Pitfalls for Parents.”  Writer Ron Lieber looked at the scenario from the vantage of a financial planner, a venture capitalist and a parent.  The planner offered sound advice, “Never invest more than you can afford to lose,” and the venture capitalist suggested closely examining the business plan and investing, if at all, in stages.

As for the parent, Mr. Lieber writes, you need “radical honesty”

 Perhaps the toughest issue is reckoning with what you’re actually trying to accomplish. Are you really investing in an entrepreneurial venture? Or are you actually just buying a job for children who can’t get one on their own? And if they can’t find an employer to hire them, isn’t it possible they lack the skills that they need to succeed as an entrepreneur?

Most of us are not in the position to loan our children $2 million.  But many are asked to make smaller investments.  What then?  For an answer I think of my dear departed father’s approach. He knew hard financial times: His immigrant father worked as a street sweeper; my father put himself through law school at night.   After he achieved financial success, a close relative, on occasion, asked him for a loan. In his work, my father had seen too often how money issues could hurt family relationships, making them awkward and often contentious. My father’s rule was never to invest what you can’t afford to lose.  

Much the same advice came from the commentary on the Times blog. One commenter, apparently well versed in giving money to relatives, says “call it a loan but consider it a gift.”  Another commenter noted that money is rarely handed over without some expectations on the part of the giver,  a view the recipient often doesn’t share.

Perhaps the best piece of advice in the Times piece came from Greg Henley, a banker turned  business professor at the University of Georgia.  He suggested parents consider what he calls the Thanksgiving dinner test:

 “If you made this investment or convinced family members to make it, what is Thanksgiving dinner going to feel like?” he asked. “How is my child going to feel facing me if the investment does not work out? Is my child going to come when I invite her to Thanksgiving dinner?”

Whether it’s money to start a business, make a down payment, or for some other financial venture, the lesson is that there’s often emotional as well as economic consequences in lending money to adult children. There’s no such thing as no-strings-attached loan.

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