How to Be the Bank of Mom and Dad: A Guide to Lending Support Without Losing Your Mind (or Money)
Many parents want to help their children financially—but just handing over a check isn’t the only option. More and more families are turning to what’s often called the “Bank of Mom and Dad,” where parents offer loans instead of gifts to children for major life expenses: buying a home, starting a business, or consolidating debt. Done well, it can be a powerful way to support your child while preserving fairness and family harmony. Done poorly, it can lead to resentment, financial strain, and even legal trouble.
This guide covers how to be the Bank of Mom and Dad wisely blending heart and head.
This is Part 1 of the Bank of Mom and Dad Series.
Part 2: How to be the Bank of Mom and Dad: Funds, Terms, and Estates – Gilbert Wealth
Part 3: The Bank of Mom and Dad: FAQ and Closing Thoughts – Gilbert Wealth
Benefits of Acting as the Bank of Mom and Dad
The Bank of Mom and Dad is exactly as it sounds. Rather than your children obtaining loans from traditional lenders, they instead obtain loans from their parents. There are several benefits to acting as the Bank of Mom and Dad:
Better Terms for Your Child
You can offer below-market interest rates, no application fees, and flexible repayment schedules.
Keeps Wealth in the Family
Instead of paying interest to a bank, your child’s payments come back to you—potentially growing your estate or supplementing your retirement income.
Opportunity to Teach Financial Responsibility
Lending instead of gifting can encourage accountability and budgeting discipline in adult children.
Estate Planning Advantages
Loans can be structured to forgive over time (e.g., annual gift tax exclusion), and balances can be considered in equalization planning among siblings.
Avoids Triggering Gift Taxes (if documented)
A properly structured loan avoids being categorized as a gift by the IRS—important for parents with significant estates.
Disadvantages to the Bank of Mom and Dad
The Bank of Mom and Dad has some great benefits but does have some notable disadvantages:
The child doesn’t build credit
Private loans don’t help the child establish or improve their credit score.
Tension if repayment fails
Missed payments can strain relationships and create long-term resentment.
Reduced liquidity
Tying up funds in a family loan may limit your flexibility for other needs or emergencies.
IRS scrutiny and documentation
Without proper loan terms and records, the IRS may treat it as a taxable gift.
Opportunity cost
Funds loaned to a child may earn less than they would in traditional investments.
Are You Ready to be the Bank?
To be the Bank of Mom and Dad, you need to do the following:
- Assess your own financial capability to finance a child’s life. How does this fit into your personal finances? Can you handle the illiquidity, lower returns, or risk of default? This is the most important step. You should not put your own future financial situation at risk to provide a little benefit to your child now. Doing so ultimately might result in you having to rely on your children in the future which is a situation most people want to avoid.
- Do you have the right set up financially to facilitate being the Bank? You need access to enough funds, at different periods of time without incurring too much cost or taxes. You will need to factor in opportunity costs, financial costs like interest incurred, and taxes.
- Is your family relationship able to withstand the new responsibilities of a loan? Mixing family and money can be a challenge particularly when things don’t go as hoped. Your child will have a new obligation of repayment to you which may strain the relationship if they struggle to make repayments. Similarly, parents may grow discontent if the child isn’t repaying while also making other financial decisions the parent doesn’t agree with. You’ll need to have clear intentions that all parties agree to, and have open communication about tough issues. Despite the benefits, it is sometimes better just to keep things separate.
When you’re ready to take the next step to becoming the Bank of Mom and Dad, check out the next two articles.