Dear Karen: Our son is gainfully employed and looking to buy a large house jointly with a friend from college. They want to operate a coop, which is very popular in their high-priced city. He is a low spender and a good investor, so he has accumulated quite a bit for his age (31). But he still needs another large chunk of change for the down payment.

My husband and I concur with his goals. We read your response to a couple asking about loaning money to their kids. By your measures, I think we’re ready to proceed with a loan or gift. We’re on the road to a stable retirement ourselves, but don’t have enough for large gifts. Plus, his sister would rightfully expect the same treatment. How do we think this through? – Overwhelmed

Dear Overwhelmed: I will begin by verifying this most important assumption: that you can afford to loan or gift him this money. Your retirement is your most important obligation: you do your kids no favor if loaning them money now makes you dependent on them later.

Given your ability, I see four basic ways for you to help him accumulate money for a down payment:

1. Invest with him in the house. This might be providing him with cash, cosigning the loan (and be prepared to step in as would be your legal obligation) or both. If you’ll be responsible for the house, be listed on the deed. This involves you with your son and his friend in all decisions, for better and worse. If you do this, you also want to consider your overall investment asset allocation – what percent of your investments (including your home) are already in real estate?
2. Sell investments and provide the money as a gift. You’d likely want to change your estate planning documents to make it “even” with your daughter.
3. You may still have access to a Home Equity Line of Credit (HELOC), even if you’ve paid off a mortgage. If so, you can take out a loan and formally loan him the money. However, this loan would likely reduce the amount of mortgage for which he can qualify.
4. Access a HELOC (or take out a new loan) and gift him the money. Since you presumably have better credit and a longer credit history, you would qualify for a larger loan at a lower rate. He would be under no obligation to repay it, but he could choose to give you annual gifts. Again, you’d likely want to change your estate documents to reflect this.

For all of these, you’d want to involve your accountant or a financial planner. If the gift of the HELOC seems to make the most sense, here are some other things to consider:

• He may choose to give you up to $14,000 per year ($28,000 for a couple; inflation indexed) without being affected by gift tax rules. If the amount is greater than the annual gift-free amount, he will need to file a form with the IRS. This may affect the HELOC terms you choose. A 5-year HELOC will have higher monthly payments than a 10-year HELOC. Gifts in this amount may surpass the annual gift-tax-free amount.
• If he chooses not to give you annual gifts (or he loses his job and can’t), you will need to sell investments to make your budget.
• All of these tax laws have been in flux for the last decade and likely for some time to come, so whatever we plan for could change any time. Overall, it sounds like the investment that he is requesting represents a non-trivial portion of your estate. If you choose to do this, you need to understand your son’s budget and affirm for yourselves that it is reasonable. He can find a pro-forma landlord business budget on the Internet, assemble his numbers, and convince you. It should consider, for instance:
  
            -What percent occupancy is he assuming?
            -PITI (principal, interest, taxes, insurance)
            -Any special hazard insurance: earthquake, flood, etc. If he’s not covered and the
             house is destroyed, what happens?
            -Umbrella insurance. This is inexpensive and covers him for liability on top of whatever
             insurance (auto, property) he has.

In summary, I’ve thrown a lot of wrenches in your son’s dream. However, I want to leave you with the thought that, approached with open eyes, loaning or gifting money it is a good and appropriate way to share your blessings with your children.

Karen Telleen-Lawton serves seniors and pre-seniors as the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). You can reach her with your financial planning questions at  This email address is being protected from spambots. You need JavaScript enabled to view it. .

Meet Karen