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You might believe your parents' finances are none of your concern, but their poor financial choices could end up affecting you. Whether you find yourself responsible for supporting their retirement at the cost of your own plans, or sacrificing your travel aspirations to help pay off their debt, here’s what you can do when a parent's financial behavior becomes an issue.
Here are some typical situations and the options available to you.
Your Parents Lack a Financial Safety Net
Many people don’t have enough set aside for retirement, and if your parents lack a retirement fund, it can be concerning. You might find yourself responsible for supporting them, especially if you feel a duty to care for them as they age. As they near retirement, it might be time to bring up the subject with them.
Ideally, you’ll want to motivate them to start saving. However, there’s only so much you can do—ultimately, the responsibility falls on them. Regardless, it’s important to understand their financial situation, so it’s time to have a conversation. Here’s how to get started:
Discuss your own financial situation: They’ll likely feel more at ease sharing their details if you start by opening up about your own.
Inquire about their future plans: What are they hoping for in retirement? What kind of lifestyle do they envision? This can lead to a conversation about how they can realistically support that lifestyle.
Recommend meeting with a financial advisor: Marketwatch suggests that financial advisors can assist in facilitating open conversations between parents and adult children and help with difficult money discussions. Suggesting a specific advisor might help as well.
Once the conversation begins, your parents might admit they need help managing their finances and ask for your assistance in reviewing their situation.
Assist with Managing Their Finances
If you’re ready to help your parents take control of their finances, here are a few steps to guide the process:
Be thorough: Start the conversation and go over every aspect of their financial situation—debts, budgets, savings, and any assistance they might need.
Involve others: It may be helpful to arrange a meeting with siblings, as Care.com advises. This ensures everyone is informed. It might also be useful to consult a third-party financial advisor.
Get their wills and trusts updated: Confirm these legal documents are in place and current. Consider hiring a lawyer to assist. You may also want to designate a power of attorney.
Check for overpayments: Review their expenses and identify any unnecessary spending they might not be aware of. Credit.com recommends verifying if their life insurance policy is larger than needed.
Review their investment portfolio: Are their investments suited to their age? It might be time to adjust their portfolio accordingly.
Your parents might not be ready for you to fully take charge of their finances. In that case, present this as a suggested course of action.
Perhaps you’ve already passed the stage of simply encouraging them to save. Maybe you’re already supporting them or planning to do so in the future. In this case, it’s important to understand how to protect your own financial well-being.
Understand the Tax Implications
For instance, let’s say you want to fully fund their retirement by giving them money. As of 2015, you can gift up to $14,000 without triggering the federal gift tax. If you give more than that amount, you’ll need to report it. Or perhaps you plan to buy them a house. If you don’t charge them rent, the IRS may consider the house a gift, as Kiplinger explains.
If you’re providing financial support to your parents, you might be able to claim them as dependents, although the official term is Qualifying Relative. There are specific criteria to meet, such as covering at least 51% of their support costs, including living expenses, medical bills, and food. Their gross income must also not exceed $3,950. The IRS provides more details here.
In general, if you are providing any form of support to your parents, it's wise to consult with a financial advisor to fully understand the tax implications involved.
Be Cautious About Co-Signing
Typically, you won’t be responsible for your parent’s debt unless you’ve co-signed as a “responsible party” or “guarantor.” Caring.com explains how this could lead to problems:
...if your parents later face financial difficulties, that guarantee could become a burden for you. One of the most common and challenging situations arises when parents move into a new living arrangement. Senior housing, assisted-living facilities, and nursing homes often require a family member to be named a financially “responsible party” to guarantee payment of ongoing fees before admitting a resident. If your parents deplete their funds, you may not want to risk their living situation by refusing to pay. However, accepting that responsibility could result in a prolonged and expensive commitment.
To safeguard your own finances, avoid rushing into co-signing or agreeing to be a guarantor.
You might consider discussing your parents’ financial situation with them and assist in creating a strategy to reduce their debt.
Be Cautious When Lending Money
When a loved one seeks financial assistance, it can be difficult to say no. If that person is your parent, you may feel a strong sense of duty to lend them money (after all, they raised you!). However, there are times when you must refuse. One financial writer shares how she kindly turned down her father:
I was frustrated when he asked me again. I was upset that he bought something, assuming I would cover the cost. It irritated me that this was happening once more. I thought about it for a while... After gathering some courage, I told him over the phone, 'I’m sorry, I love you, but I can’t give you this money.' He said hurtful things, threw a tantrum, and got angry. But eventually, he got over it. And I felt much better after that conversation.
Of course, another option is agreeing to help. Here are a few things to consider if you decide to lend money to your parent:
Consider simply gifting them the money. Don’t expect it to be repaid. If the amount exceeds $14,000, you’ll need to report it as a gift on your taxes.
Set up a repayment agreement: When will they repay you? Establish a schedule and keep track of any payments they make.
It may turn into a recurring need: If your parents are facing financial difficulties, they may struggle with medical bills or other expenses as they age. Be ready to help with these ongoing costs.
Ask for help from siblings: You might not be able to shoulder the financial responsibility of your parents alone. This could affect your own needs. Depending on your circumstances, consider reaching out to siblings or other relatives for assistance.
Lending money to your parents is one thing. However, as they age or their financial challenges worsen, you may find yourself needing to take on a more significant role in managing their finances altogether.
Your Parents Have Taken Over Your Credit
It’s one thing to feel responsible for helping your parent when their finances are out of control. But what happens if their actions pull you down with them? Unfortunately, this can happen, and it's known as child identity theft. The most common form of child identity theft occurs when a family member, often a parent, uses their child’s personal information to open accounts, apply for credit lines, or seek benefits, as explained by the Identity Theft Resource Center.
This type of theft often goes unnoticed for years and may only come to light when you’re trying to purchase a home or apply for a loan, only to discover your credit has been ruined. Creditcards.com highlights several warning signs to watch out for:
Credit card offers are sent in the child’s name or a nickname, even though the child has no bank account.
The parent or relative faces financial struggles but suddenly seems to have more money.
The parent has a history of misusing other people’s identities.
Even though the parent and child live separately, the child’s name shows up on the parent’s caller ID system.
If you think you’ve fallen victim to this, the first step is to confirm your suspicions. Obtain a copy of your credit report and carefully examine it to check for debts that you didn’t incur. From there, you have two general options: report the fraud to the authorities or handle it outside of the formal system.
Report the Fraud to the Authorities
Imagine your parent has damaged your credit, and you don’t want to deal with the aftermath or spend years fixing it. That’s a fair expectation, but it can’t happen without involving the authorities, according to Credit.com. Eva Velasquez, president of the Identity Theft Resource Center, shared with the site:
Without a police report, companies are not legally required to acknowledge fraud. Legal protections, such as those under the Fair Credit Reporting Act, won’t be activated until you file a police report. Organizations are under no obligation to investigate your claims or remove fraudulent charges unless you take the necessary steps to prove your innocence.
The ITRC offers a step-by-step guide for handling financial fraud. Unfortunately, it includes filing a police report, which means you’ll have to identify your parent as the perpetrator. To dispute the fraudulent charges on your credit report, the bureaus will require a police report to proceed.
It’s also crucial to place a fraud alert on your credit report. We’ve provided additional instructions here for your reference.
Naturally, there will be consequences for the parent involved. They could face fines, jail time, or both, as LegalMatch explains. More detailed consequences can be found here.
Resolve the Issue Privately
Another route is to work things out directly with your parent. This means sitting down to have a candid conversation, and agreeing on a repayment plan. Financial expert Erica Sandberg suggests a few helpful steps:
Reach out to the credit card companies: Explain the situation and inquire about a repayment arrangement. You might be able to negotiate a reduced interest rate. Ensure that the accounts are closed, if they haven't been already.
Include a statement on your credit reports: Sandberg advises adding a note explaining that your parent used your identity and credit without your consent. While this won’t improve your score, it could help if someone reviews your credit to approve you for something.
Work on rebuilding your credit: This could involve applying for a new card and making consistent full payments each month. For more details on improving your credit, see our guide.
Naturally, you’ll also need to take steps to safeguard your credit moving forward. Regularly check your report to ensure that no new debts have been added in your name. This option relies on trusting your parent to repay the debt and, crucially, to not continue harming your credit in the future.
You’re Responsible for Their Debt
Once again, unless you’ve co-signed, your parents' debts are their responsibility. However, after they pass, their financial obligations may still impact you, particularly if you inherit their estate. Below are several types of debt a parent might leave behind and how they could affect you later on.
Credit card debt: Even if you’re not a co-signer, debt collectors may attempt to convince you that you’re responsible for your parents’ debts, as CNN reports. However, they can only contact you for repayment if you are the executor of your parents’ estate.
Medical bills: If your parent has outstanding medical expenses, their estate is typically responsible for paying these, as long as funds are available. But some states have “filial responsibility statutes,” which could require adult children to pay for unpaid medical bills if the estate cannot cover them. However, legal site Nolo explains that certain criteria must be met, and these laws are rarely enforced.
Mortgages: Should you inherit your parents’ home and they still have a mortgage, you will need to continue making payments. If this becomes unaffordable, you have options such as disclaiming the inheritance, or pursuing a short sale or foreclosure, according to Interest.com.
It’s wise to consult a legal expert in these situations, as inheritance and estate laws can be quite complicated. Still, being aware of your options and what to expect can help you navigate these challenges more smoothly.
If you feel personally responsible for assuming your parents’ debt at any point, AgingCare.com offers several helpful suggestions:
Explore whether payments can be reduced to better suit your parent’s limited income.
Look into a reverse mortgage if your parent owns a home without a mortgage balance.
Consider writing to the creditor, explaining that there are no assets and requesting “debt forgiveness.”
If you’ve co-signed on a loan, the responsibility for the debt falls on you if it goes unpaid.
Money is often a delicate topic for anyone, but when it comes to your parents, they might be even more reluctant to discuss it. If their financial behavior is impacting your own finances, it may be time to step in and address the issue.
If the situation is too complicated for you to handle, it might be wise to reach out to a professional. Regardless of your decision, approach the conversation thoughtfully, prepare for what lies ahead, and take steps to protect yourself.
Illustration by Sam Woolley.
