• 26
  • October
    2010

In a previous post, we discussed how there has been an increase in recent years in people over the age of 65 filing for bankruptcy. A couple of the reasons cited for the trend included parents helping out their children and never being paid back. Many parents felt betrayed by their children, but many seniors also said that they would rather file for bankruptcy than ask for financial help from their children. For these reasons, parents should carefully consider whether or not they want to or are able to contribute a significant amount of money to an adult child who comes to them with a business idea.

The New York Times published a helpful piece on this issue last week, Underwriting a Child's Business Poses Pitfalls for Parents. The author of the article, Ron Lieber, says that parents should consider their child's business venture from the various perspectives of a financial planner, a venture capitalist and a parent. The first two perspectives force a parent to consider the business plan objectively and to consider the costs versus the benefits of the business as well as how much they can afford to give. The financial planner, for example, would advise never to invest more than you can afford to lose.

Parents who give more than they can afford to lose to a business that fails can end up in bankruptcy. The Times article was actually inspired by the situation of Georgia gubernatorial candidate Nathan Deal. Deal and his wife came close to bankruptcy after investing in their daughter and son-in-law's sporting goods store that later failed.

Parents should be honest with themselves in their assessment of whether their child's business proposal would be a good investment for them. Of course parents want to help their children, but it doesn't help children to invest in a business venture that has a good chance of failing. There is also the disconnect to consider between a child's greater ability or willingness to take a financial risk, whereas a parent should be more conservative in their investments since they are nearing retirement.