Should You Lend Money to Your Adult Children?
- bryanjepson
- 1 day ago
- 10 min read
A recently widowed client asked me an important planning question, one that many parents eventually face.
One of her sons was preparing to enter graduate school, and his 529 plan had been depleted during his undergraduate years. At the same time, she had just received life insurance proceeds following her spouse's death. Should she use some of that money to help pay for graduate school for her son instead of requiring him to take out federal student loans? And if so, should she give him the money outright or lend it to him with the expectation that he pays her back? Should she charge him interest?
This scenario raise several important planning considerations that any parent should think about before lending money to your adult children:
Should I simply give them the money?
Should I lend it to them with the expectation that they will repay me?
Will taking this money out of circulation affect my own retirement security?
Am I setting a precedent for my other children or family members?
These are not small decisions. The financial consequences can be significant, and the relationship consequences can be even greater. Mixing money and family can strengthen relationships—or permanently damage them. It is far easier to establish expectations before money changes hands than it is to repair misunderstandings later.
Most parents genuinely want to help their children succeed, especially when they are facing educational expenses, a first home purchase, a business opportunity, or an unexpected setback. The challenge is determining the best way to provide that help without creating unintended financial or family complications.
There is no one-size-fits-all answer, but there are several important questions worth considering before deciding whether to gift money, lend money, or simply say no.
Why This Decision to Lend Money to your Adult Children Is Harder Than It Looks
These questions are harder than they may appear because they force us as parents to balance several legitimate but competing priorities.
Goal #1: Help Your Child
Most parents I have met—especially those who worked hard to create their own success—know how difficult that journey can be. Naturally, they want to make things a little easier for their children.
The challenge is determining where the line lies between giving a child a head start and teaching the value of hard work, sacrifice, and personal responsibility. The conversation becomes even more complicated when parents have the financial resources to help and their children know it.
That is when it becomes especially important to be intentional about expectations, standards, and boundaries.
Goal #2: Protect Your Retirement
Many parents do not have unlimited resources. Every dollar given to a child is a dollar that is no longer available to support their own financial goals.
As parents, our instinct is often to sacrifice for our children. But is hurting yourself financially really helping them?
If giving money today compromises your retirement tomorrow, your children may ultimately inherit a different burden—the responsibility of helping support you later in life.
This is why I frequently remind clients:
Your kids can borrow for college.
They can borrow for a house.
They can borrow to start a business.
You cannot borrow for retirement.
Before helping your children financially, make sure your own long-term financial security remains intact.
Goal #3: Preserve Family Relationships
Financial disagreements have damaged far more families than market crashes.
This becomes especially challenging when there are multiple siblings. One child may view financial assistance as generosity, while another may see favoritism. Even when parents believe they are being fair, children do not always perceive it that way.
On the other hand, if parents have the resources to help and choose not to, it may be equally important to explain the reasoning behind that decision. Children do not always need to agree with a decision, but they are more likely to understand it when the thought process is clear.
Either way, these situations can become messy. In many cases, the relationship risk is actually greater than the financial risk.
The Three Choices
When a child asks for money, there are really only three options:
Give it
Lend it
Say no
Each approach has advantages and disadvantages. The right answer depends on your financial situation, your relationship with your child, and the purpose of the request. Let's look at each option individually.
Option #1: Give It
A gift is the most straightforward option. The money changes hands, there is no expectation of repayment, and everyone moves on.
Before doing so, however, it is worth understanding a few basic gift tax rules.
A Quick Refresher on Gift Tax Rules
The Annual Gift Tax Exclusion
The annual gift tax exclusion is the amount that one individual can give to another individual each year without requiring a gift tax filing.
The exclusion amount is adjusted periodically for inflation. In 2026, the annual exclusion is $19,000 per recipient.
For married couples, each spouse has their own exclusion amount. This means a married couple can generally gift up to $38,000 to a child in a single year without using any of their lifetime exemption.
The Lifetime Gift and Estate Tax Exemption
What happens if your gift exceeds the annual exclusion amount?
In that case, you may need to file IRS Form 709 to report the gift. Filing the form does not necessarily mean you owe tax.
Instead, gifts above the annual exclusion generally reduce your available lifetime gift and estate tax exemption. The current exemption is approximately $15 million per person, or roughly $30 million for a married couple.
As a result, most families will never actually pay gift tax. They simply need to report larger gifts when required.
Advantages of Giving the Money
A gift offers several advantages:
No repayment stress
No awkward collection conversations
No creditor-debtor relationship
Clear transfer of ownership
No ongoing loan administration
In some situations, a gift may actually be cleaner and less complicated than a loan.
Disadvantages of Giving the Money
There are also potential downsides:
May create expectations for future assistance
May create fairness concerns among siblings
May encourage financial dependency
Removes assets that could otherwise support your own financial goals
Once gifted, the money is no longer available to support your retirement, healthcare needs, or other future priorities. If your circumstances change later, recovering those funds may be difficult or impossible.
Think Beyond the Best-Case Scenario
Ultimately, deciding whether to make a gift comes down to your ability to live comfortably with the potential downsides.
Before writing the check, consider not only the best-case scenario but also the worst-case scenario.
What happens if another child asks for similar assistance?
What happens if your own financial circumstances change?
What happens if the gift does not produce the outcome you hoped for?
Unlike a loan, a gift is difficult to unwind once the money has changed hands. That doesn't make gifting the wrong decision, but it does mean the decision deserves careful thought before the money leaves your account.
Option 2: Lend It
If giving the money outright doesn't feel right, or would create other challenges, you might consider lending the money instead.
A loan creates accountability. Unlike a gift, there is an expectation that the money will be repaid. For some families, this strikes a comfortable middle ground between providing support and maintaining financial responsibility.
If you choose this path, you can and should charge interest.
A Few IRS Rules to Know
The IRS generally expects family loans to resemble legitimate loans rather than disguised gifts.
The Applicable Federal Rate (AFR)
The IRS publishes Applicable Federal Rates (AFRs) each month. These rates vary depending on the length and structure of the loan.
If you charge less than the applicable AFR, the IRS may treat the forgone interest as a gift. This is known as imputed interest.
In practical terms, this means you can lend money at a below-market rate if you choose, but some of the interest you did not charge may need to be treated as a gift for tax purposes.
Small Loan Exception
Loans of $10,000 or less are generally exempt from the imputed interest rules, provided the funds are not used to purchase income-producing assets.
Loans Under $100,000
The IRS also provides special rules for loans between individuals when the total outstanding balance is $100,000 or less.
Without getting too deep into the technical details, these rules often reduce or eliminate the practical impact of imputed interest when the borrower has little investment income. If you are considering a larger family loan, consult your tax advisor for guidance.
Treat It Like a Real Loan
If you decide to lend the money, document it properly.
At a minimum, consider including:
Written promissory note
Loan amount
Interest rate
Repayment schedule
Due date
Evidence of payments
The more the arrangement resembles a legitimate loan, the easier it is to demonstrate your intent if questions arise later.
Advantages of Lending the Money
Encourages responsibility
Preserves family assets
Establishes clear expectations
Creates accountability
Provides flexibility if circumstances change
One often-overlooked advantage is that a loan can later be converted into a gift. If circumstances change, you can always forgive part or all of the remaining balance and document the forgiveness as a gift at that time.
Disadvantages of Lending the Money
Can strain relationships
Parents become creditors
Collection conversations can become emotional
Missed payments can create resentment
Expectations may differ between parent and child
This last point is where many family loans go wrong.
Parents often view the transaction as a loan. Children sometimes view it as temporary assistance. When those expectations are not aligned from the beginning, misunderstandings can follow.
Many family loans fail because they are treated as gifts emotionally but loans legally. If the arrangement is truly intended to be a loan, establish it as a loan from the outset and require the borrower to abide by the agreed-upon terms—just as they would with any other lender.
Option 3: Say No
For many parents, this is the hardest option.
Our instinct is to help our children, especially when they are facing a challenge or setback. Yet sometimes saying no may be the most loving decision.
Before giving money to a child—whether as a gift or a loan—it is important to think through the long-term implications for both of you.
Protecting Your Own Future
The first question is whether helping your child will compromise your own financial security.
Remember that your children generally still have time and options to create their own successful financial outcomes. You may not.
If you are retired or approaching retirement, your investment portfolio is more than an asset—it is your paycheck. If those assets are depleted too quickly, your future options become increasingly limited.
This is why I often remind clients:
Your children can borrow for college.
They can borrow for a home.
They can borrow to start a business.
You cannot borrow for retirement.
In the long run, maintaining your own financial independence may be one of the greatest gifts you can give your children. It is far better to support yourself than to eventually become financially dependent on them.
Considering the Bigger Picture
It is also worth considering what message your decision sends.
Will providing financial assistance help your child overcome a temporary obstacle and move forward successfully?
Or will it create an expectation that family money is always available whenever things become difficult?
Will the assistance encourage growth and responsibility, or delay it?
And how will your other children view the situation?
Even when parents believe they are being fair, siblings may see things differently. A single financial decision can create expectations, perceptions of favoritism, or family tension that lasts for years.
Sometimes the Hardest Decision Is the Right One
None of this means that helping your children is wrong. In many situations, it is absolutely the right thing to do.
But there are also situations where saying no is the better answer.
If providing the money would jeopardize your retirement, create family conflict, or prevent your child from developing their own financial independence, declining the request may ultimately be the most loving decision you can make.
Sometimes the hardest decision is also the wisest one.
Before You Write the Check: Ask Three Questions
Question #1: Can I Afford to Never See This Money Again?
Whether you are considering a gift or a loan, start by assuming the money is never coming back.
Would your retirement still be secure?
Would your other financial goals still be achievable?
If the answer is no, the discussion may already be over.
Never give or lend money that you may need later. Your children will generally have time and opportunities to recover from financial setbacks. You may not.
Question #2: Is This a Good Plan or Just a Good Person?
Most parents want to help their children. The challenge is separating the person from the proposal.
Ask yourself:
Is the plan realistic?
Does repayment seem plausible?
Has this person demonstrated financial responsibility?
Is this assistance likely to solve the problem or simply postpone it?
Love can cloud judgment. Sometimes our desire to help causes us to overlook risks that would be obvious in any other situation.
Question #3: How Will I Explain This to My Other Children?
This is the question many families forget to ask.
If one child receives $100,000:
Is it a gift or a loan?
Will it reduce a future inheritance?
Have expectations been clearly communicated?
Has the arrangement been documented?
Many family conflicts are not caused by the money itself. They are caused by differing assumptions about the money.
What seems perfectly reasonable to one child may feel unfair to another. Unspoken assumptions create lasting resentment.
The Risk Families Often Miss
None of these questions will tell you exactly what to do. But they will help you identify the real risks.
In my experience, the financial risk is usually obvious. The relationship risk is the one families tend to underestimate.
Before writing the check, make sure you have considered both.
Final Thoughts
Most parents want to help their children. That instinct is natural and often admirable.
The challenge is making sure that today's generosity does not create tomorrow's problems.
Before giving or lending money, take time to consider the impact on your own financial security, the expectations it may create, and the effect it could have on family relationships. What appears to be a simple financial transaction is often much more than that.
Sometimes the right answer is to give the money. Sometimes it is to structure it as a loan. And sometimes the best answer is to say no.
There is no universal rule that applies to every family or every situation. The goal is not to find the perfect answer. The goal is to make a thoughtful decision that aligns with your values, protects your financial future, and preserves the relationships that matter most.
After all, the money is important. But the family is the reason the money matters in the first place.
So what did my client decide?
In her situation, the best answer was to say no—for now.
It wasn't a hard no. Her son qualified for federal student loans and intended to work in a rural area after graduation, where he may be eligible for Public Service Loan Forgiveness. Together, they decided it made more sense to preserve her assets and utilize the federal loan program while keeping their options open.
If his career plans change in the future, they can always revisit the decision. But once she gives away the money, that option disappears. In this case, preserving flexibility turned out to be the most valuable choice of all.
If you would like help working through your own financial situation and how decisions like these might affect your family's future, I'd love to hear from you. You can schedule an introductory Zoom call here.
If you'd like to read more about smart use of your retirement assets, check out these posts:
Disclaimer: the material in this blog post is intended for general educational purposes only and should not be considered specific financial advice. You should always consult with your personal financial advisor to see how it might fit within your personalized financial plan.