Financial literacy is a big problem with kids, who might not understand the double-edged sword of compounding—which showers blessings on investors and casts anathema on debtors.

Amanda McGrath at Asset Advisory Group in Kinnelon, N.J., says she frequently sees credit card problems among the adult children of clients. The parents don’t understand how big or bad the problem is.

“I’m 35, so a big part of my practice is meeting with the next generation, ages 20 to 40,” McGrath says. “What we’re finding with financial literacy not being taught as heavily as I think it should be in school … a lot of the kids, even though they are well-intended, don’t understand with credit card debt, the implications of it and why it should be paid off in full each month.” One set of her recently retired client couples asked McGrath to meet with their two daughters in their 20s. Each daughter is married and has children and each had $30,000 in credit card debt accumulated over time, starting from when they were young and shopping at places like Express and Best Buy and eating restaurant food. Later on, with children and families and increasing interest, they were having an impossible time paying down principal that had gotten out of hand. The parents had to gift them the money for the short term but didn’t want to wipe out the debt. “The kids are paying them back at a much lower interest rate than the 30% those cards were at.” It’s a fresh start, and the daughters are making the payments. “But it can be a drain on the couple.”

Forrest Baumhover at Lawrence Financial Planning in Tampa, Fla., says spendthrift trusts can keep money out of beneficiaries’ hands until they reach a certain age, handing out money when the child reaches certain milestones—age 25, 30, 35, etc. “The flip side of that is called controlling from the grave,” he says. If the child is already showing signs of responsibility—getting a job and starting a family and asking nothing, then the parents’ wills might be outdated and the thorny stipulations should be removed.

Lauren Lindsay, a CFP at the Westwood Group in Houston, says that she’s also seeing children get divorced and not have enough money to buy new houses, so they turn to the parents for financial help. “This has happened to several of my clients, and in one family to two children within a year of each other,” she says. “Divorce is expensive, and two households are more expensive than one, and many people don’t have a financial cushion so are coming and asking for ‘an advance’ on their inheritance.” It can unravel an otherwise successful retirement plan for the clients, she says.

Mike Kurz at Overshare Advice and Planning in Frisco, Texas, says in these situations his firm acts as a “connector” and “solver,” getting families in touch with other specialists—from doctors to counselors to attorneys. “We are not there just to say ‘no’ or tell the parents to not write the check,” Kurz says. “Oftentimes we have seen the parents are a bit lost and need direction to work through the process of even understanding the situation. It’s not uncommon to have one parent that is super empathetic and one that is much more resistant. They both have valid feelings and concerns but often can’t find common ground to address it and move forward.”

Kurz uses this methodology to handle this particular problem: First, the firm asks permission to have the personal conversation and tell clients it’s part of the planning. Once they have an open discussion, they get a point of reference. Then the firm begins investigating what resources the client might have to get the child through the issue—whether it’s an attorney for legal problems or a counselor or therapist.

“Now we can establish financial commitment along with boundaries,” Kurz says. “For instance, we can budget for $10,000 in legal fees and $2,000 in counseling. If it is a child that hasn’t yet found a job or has had an extended unemployment, we can help by reviewing their skills and résumé to help position them in a better light. We write articles, blogs and marketing pieces so we have the skills to offer suggestions. We can also connect them with professional services for résumé writing and job searches.”

Families dealing with stress “hit neutral,” he says. “This is to say, they may normally be great at researching online for resources and making decisions, [but] now suddenly they can’t take the next step without help; they need a hand to hold and assurance they are making a good decision. We document the process and steps the family would like to take in order to move forward. This can help keep everyone on track along with having full transparency to the children on how the parents are going to handle the issue.”

He says the firm is also there to play bad cop if necessary for the parents. “In this scenario, the parents simply say, ‘We love you and we are here for emotional support. Unfortunately, we can no longer pay for these services or for these items or for these mistakes. We have spoken to our financial planner on multiple occasions and this is all we can do.’”

Where Money Meets Addiction
Financial advisor Catherine Seeber finally had her eyes opened to her son’s addiction to pills when she discovered he had taken money out of her purse. It was irrefutable evidence of his drug problems.

Part of the problem was his college engineering program, which required a familiar cocktail of drugs to both stay awake and go to sleep. But she also says that he’d had self-esteem problems as a youth and that drugs had been a problem before that. “It was a 10-year battle,” says Seeber, a CFP with Captrust based in Lewes, Del.