Question: My wife and I are in our early 70’s, enjoy relatively good health, and live near one of our three children – wherein lies our problem. Our son and daughter who live halfway across the country are married, have children, have good jobs, and, from all appearances, live stable lives. On the other hand, the daughter who lives near us has been married three times, jumps from job to job, and is in constant need of our financial assistance.

My wife and I have helped her for years, and although our daughter calls our help "loans," we have never seen any repayment. We have kept a tally of our help during the past several years, and it amounts to tens of thousands of dollars. Our daughter requested that each check be stubbed "loan" because she said she would repay us. With the economy the way it is, the reduction of the size of our estate due to the stock market, and rising costs of living – not to mention being fair to our other children -- we don’t know how to stop the outflow, how to tell our daughter "no," or how to make it up to our other children.

Answer: Today’s difficult economy is a double-edged sword: More children are seeking financial help from parents and other relatives at the same time that more parents are concerned they might not have enough money to last their lifetime.

That said, it appears that you and your wife have been enabling your daughter to continue her downward spiral by making funds available to her without responsibility for repayment. This has not been beneficial to your daughter or to you and your wife. Given your daughter’s age and track record, this will not stop unless you stop it.

Since you’ve now decided that you can’t afford to place your own financial future at risk, saying “no more” may be difficult, but far less difficult than what the future might hold if you don’t do something now. Making loans to family members can injure relationships and cause tax and estate planning problems. While making occasional or planned gifts to family members is fine within limits, loans should be business deals that are thoroughly documented, not only for potential tax purposes but also to make sure all of your children are treated equally, if that is your desire.

For example, "loans" at no interest or below market rates to family members can result in income being imputed to you. This means that the IRS could assume that your daughter paid you interest that would be reportable income to you for tax purposes. This additional "income," in turn, could result in higher taxes on your Social Security, as we pointed out in a recent column. While there are exceptions to the imputed interest rules, it doesn’t appear to be the case here.

Taking the NextStep: We suggest that you tally up the amounts you have paid your daughter and sit down with her to explain the situation. Contact a certified public accountant to make sure you are not unwittingly paddling over Niagara Falls. If you want to make sure that all of your children are treated equally, your wills should reflect that the amounts you "loaned" to your daughter should be offset against her share of your ultimate estate. And since your daughter has these types of problems, make sure that she is not put in a position of acting as a fiduciary for either of you. In too many instances, family members with financial problems and who are acting as trustees or attorneys take advantage of aging adults and engage in self-serving transactions that result in expensive litigation. We also suggest that your wills develop payment plans so that your daughter’s share is distributed to her over time. Lastly, look to a corporate or outside source to act as financial agent, trustee, and personal representative to keep your children out of what could be an explosive situation.