A new approach to the 'family bank'

Published: Friday, May 31 2013 4:50 p.m. MDT

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Young Americans increasingly expect to be financially supported by their parents well into their 20s, says a new study released by Junior Achievement and the Allstate Foundation.

In response, some parents have found innovative ways to both help their children succeed and teach them financial responsibility.

New York Times reporter Paul Sullivan wrote about such parents in his article “Loans from a bank supported by the family tree.” In the article, Sullivan interviews various parents who have developed a loan system not unlike banks and private investors to help their children land on their feet.

“These families are working to support their children’s interest without robbing them of motivation, causing rifts among their siblings or even running afoul of the Internal Revenue Service,” he wrote.

Sullivan recommends that parents who follow such a model put restrictions and guidelines on their loans, such as limiting financing to business ventures, investments or a mortgage on a house while refusing payment for living expenses or travel.

The language of the loan terms is also important, according to Sullivan, and should include a clear explanation that it has to be repaid.

There are risks to such a system. As Sullivan points out, families that struggle with pre-existing dysfunctional relationships may want to avoid the added stress of high-risk financial dealings between family members.

The loan system is also at risk of being misunderstood by the IRS, which is why Sullivan recommends each transaction include proper documentation to make sure it is recognized as a loan, not a gift.

“Helping children is at the heart of these loans,” Sullivan wrote in his article Friday. “But if done right, they can do a lot more than provide low-interest financing that a bank might not approve.”

JJ Feinauer is a graduate of Southern Virginia University and an intern for the Moneywise page on DeseretNews.com. Email: jfeinauer@deseretdigital.com, Twitter: @johnorjj.

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