With unemployment still close to double digits and entry-level jobs in short supply, it's tempting for parents of college graduates—and other struggling twenty-somethings—to try to help their adult children start businesses. 

If you have an adult child asking you for investment capital to launch a new business, you may be strongly tempted to comply. It might be a good investment, or it might not. Either way, a recent article in The Wall Street Journal points out several things you can do to preserve both your capital and your relationship.

• Understand that most start-up businesses fail within the first few years, so there is a good chance that your “investment” will not pay off, or if it does, it may take longer than you expected. Decide now whether you are making a gift with no expectation of getting your money back, an investment for an equity position, or a loan at a favorable interest rate. There is no single right answer, but make sure everyone is on the same page about the nature of your investment. Also, be sure to consult your attorney about any gift- and estate-tax implications.                                                                                                                                                                                                         
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• Get it in writing. Families often “forget” this important aspect of any financial deal, but it’s important for both sides to put the terms in writing to prevent misunderstandings down the road. Remember, if you want to preserve both your money and your relationship, a written agreement is your friend.
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• Treat your child like an adult. Don’t become a nagging parent, but rather try to foster an environment that encourages your child to come to you with open, honest communication. And allow your adult child to run the business without unnecessary interference.
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• Give advice as needed. It’s a fair bet that your child has never run a business before, in fact he or she may not have much business experience at all. Consider taking an advisory role, and don’t be surprised or indignant of your first-time CEO makes a few rookie mistakes.
• Examine your own motives. Make sure you are providing funds to help the fledgling business, and that you are not trying to buy your kids’ love.
• Consider Your Other Children  As an estate planning attorney, I see many generous parents who "give" their child a loan.  Those same parents also have one or more other children, who either never ask for loan or pay back any and all loans.  When the well-meaning parents die, the question arises "Did Mom and Dad give the money to our sibling or did they lend the money to our sibling?"  As you can imagine, there are usually differing versions of the story if there is no documentation regarding the terms of the transaction.  In the event, a parent gives a child a loan, and the child refuses to sign a promissory note or other legal document reflecting the loan, the parent can amend (or draft) their estate planning documents to reflect said loan.  The estate planning document can include language such as (1) a child's share of the estate (inheritance) will include the outstanding balance of the loan, or (2) a child's share of the estatewill be reduced by the outstanding balance of the loan, if any.

Reference: The Wall Street Journal Online (June 7, 2011): For You, Graduate, Some Start-Up Capital

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