More than half of American adults ages 18-30 lived with their parents in 2020. Obviously, part of this was due to the pandemic. With that said, millions of young adults are continuing to return to the nest due to ever rising rent, home prices and mortgage rates.
Whether these arrangements of adult children living at home work well for all involved depends a large part to how the arrangement is addressed by both the child and the adult parents. Here are things to keep in mind when an adult child moves back home:
- The adult parents’ number one priority in most situations, should be to ensure that the adults retirement is secured while the parent is helping the adult child since the adult parent has far few years to reach financial goals than their children have. With that in mind, parents should consider asking the child to pay a monthly amount to help cover the cost of the child’s return to the home. A good way to do this is to give the child a sense of your own financial situation. Let them know what your own financial goals are considering your retirement.
- If you provide free or below market rate housing you at least have a right to insist that your child put that savings towards a productive use. A 2019, survey by home services website Porch found that the average foster parents housing cost for an adult child was $459 per month—and that was before inflation. That is almost $6,000 a year.
If you can afford to allow a child to live at home without asking for him/her to contribute toward their expenses at least consider insisting that the adult child put the money to productive use. Make sure you’re not subsidizing their discretionary spending. Come to an agreement with the child about the minimum monthly amount that he/she will put towards a goal such as paying down debt, saving to buy a home or if they are working contributing to his/her IRA or 401k.
Even if the child does not have an income you need to insist on a monthly payment that child should be making to help offset their cost of living at home. Such a payment could be the motivation that the child needs to get into the workforce. There are exceptions, due to the special needs of the child or a full-time school status where earning an income might not be possible.
Whatever the amount the adult child agrees to pay don’t officially call it rent. Instead consider these payments be the child’s contribution to household expenses. Technically speaking, if the child pays rent, and the parents want to follow the letter of the law they must declare such payments as monthly income on their taxes. Generally, there is not any tax consequences when a stay at home child makes a more generous monthly contribution to help cover household costs, especially if the total payments for the year remain below the $16,000 annual gift tax exclusion.
Children who live at home must be added to the parents’ auto insurance policies. Auto insurance insurers typically require that every licensed driver living in the household have an auto insurance policy. If your stay at home child has his/her own policy, make sure that it will cover them even if they drive one of your vehicles. If the child does not have his/her own auto insurance policy you are required to add him/her to your own.
Interestingly, if the adult child has his/her own auto insurance policy, such child may have to add you on to his/her policy. WARNING- If a member of the household is listed as an excluded driver, he or she must never drive any of the covered vehicles. Failing to follow the insurers list of driver’s rules can result in an accident not being covered and the adult child’s parent being exposed to liability issues.
Having a child stay at home with parents can have estate implications. If an adult child continues to live with his/her parents for a significant timeframe, sibling resentment may occur as other children wonder how much money their parents or parents are spending to take care of one of their siblings. Even though it may not be any of their business, it might be wise to let the other children know that their brother/sister is contributing significantly to the cost of their “residency” with their parents.
If this stay at home arrangements continues for a significant period of time the adult child’s parents may want to consider making specific gifts to other siblings to offset this generosity that they are bestowing on one adult child to make the other children feel better about the situation. They also could address this in their estate plans, differentiating how much they choose to give to the stay at home adult versus the other siblings.
WARNING- There have been numerous cases where children remain in the parents’ home until both parents pass away, then claiming that they were acting as caregivers and requesting compensation from the deceased parent or parents’ estate for their years of caregiving service. For those who might be concerned that the stay at home child would try something like this, it would be wise to discuss the matter with your estate planning attorney as a well written estate plan can minimize the risk in this regard.
Material for this article came from comments made by David Haas, CFP from Cereus Financial Advisors, LLC located in Franklin Lakes, New Jersey.