Should You Give Money to Family Members?

First, decide if you can afford to give help. An Ameriprise Financial survey found that many baby boomers didn't realize how much the help they were providing cut into their own retirement savings. About 30 percent of baby boomers said the money they gave their adult children negatively affected their own retirement savings, but most were unaware of the impact.

Consider saying "No"--firmly. Declining a request for help, while painful, is sometimes the best decision a person can make, especially since many loans never get paid back. The top priority needs to be staying solvent oneself, says Ted Beck, president of the National Endowment for Financial Education.

Look for nonmonetary alternatives. Tina Kimball, a 30-something administrative assistant in Dayton, Ohio, loaned her parents her car when an accident left theirs unusable. If the situation worsened, she says, she would invite them to live with her family. Kimball says she wishes she could give them money, but with her own family finances under pressure, she's doing the most she can.

Put all loans and gifts in writing. Relatives lending more than $1,000 should draw up a simple document describing the terms of the loan, including the interest rate and schedule for repayment, recommends Jennifer Streaks, a financial services attorney in Washington, D.C. In addition to preventing misunderstandings, the paperwork can be important for legal reasons, too. This year, amounts over $12,000 are subject to gift taxes, and unless a certain interest rate set by the Treasury Department is charged--currently 1.63 percent or higher--loans could also be considered gifts.

Consider what might be expected in return. Donald Cox, professor of economics at Boston College, says that people who give or lend money to relatives are usually motivated by altruism, but sometimes something is expected in return. For example, if parents give money to their child for a down payment for a house or college tuition, they may expect assistance later. "Many adult children who are providing care for needy, elderly parents say they are doing this out of a sense of reciprocity," he says.

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