The Bank of Grandma and Grandpa needs to toughen up.
It's one thing for seniors to plan inheritances for family members and provide cash gifts when affordable.
Where they must set limits is in co-signing or guaranteeing loans for relatives.
Seniors guaranteeing loans is bad business and it also comes dangerously close to elder financial abuse, an unseen but serious problem that can leave seniors destitute.
Elder financial abuse means the illegal or unauthorized use of seniors' assets – money or property. Laura Tamblyn Watts, a lawyer and senior fellow at the Canadian Centre for Elder Law, said research shows one in 12 seniors will experience financial abuse. Given how under-reported the problem is, she suspects the actual figure is one in eight.
Seniors are a natural target at a time when debt levels are high, economic growth is modest and the divide between rich and poor is wide. "The seniors that we have right now have an overwhelmingly cautious financial vision – they were the savers," Ms. Tamblyn Watts said. "They may not have a lot of money, but they've saved, they've been careful and they've been prudent."
The research firm Harris/Decima issued a study in 2006 that estimated $1-trillion would be transferred from seniors to younger family members in the 20 years following the report. Some relatives are too impatient to wait, though. Estimates show that one-half to two-thirds of elder financial abuse cases involve family members, Ms. Tamblyn Watts said.
Asking a senior to co-sign or guarantee a loan is a form of elder abuse when he or she is not in a financial position to pay the entire amount being borrowed without suffering financial harm. "Most people don't realize that when you guarantee or co-sign a loan, you're as good as taking out the loan yourself. You're completely liable for that sum," Ms. Tamblyn Watts said.
There are few statistics on financial elder abuse in Canada, but a 2009 report by insurer MetLife pegged the total annual loss suffered by victimized seniors in the United States at $2.6-billion (U.S.). Anecdotal evidence from that country suggests seniors who co-signed or guaranteed mortgages were hit hard when the housing market crashed several years ago, Ms. Tamblyn Watts said. "We've seen massive foreclosures on seniors and massive poverty as a result of loans guaranteed and foreclosures when the bubble burst."
In less severe outcomes, a senior might have to use up a big part of his or her savings to make good on a loan. Or, a long paid-off house might have to be remortgaged. Seniors are especially vulnerable to these setbacks because they don't typically have the time or means to replace what's gone. Ms. Tamblyn Watts said it's possible in rare cases to reverse a senior's commitment on a loan, but doing so is both difficult and expensive because of legal costs.
Ideally, a senior would co-sign or guarantee a loan for a relative and then have no further involvement as the debt is repaid in a timely way.
But Ms. Tamblyn Watts said the type of person asking for help getting a loan is often a bad risk. "We call it the unsuccessful grandson, or the nephew in the basement – someone who has never been completely successful in life and has a new enterprise. That situation almost always goes awry."
Seniors may also be asked to guarantee or co-sign loans for family members who are trying to make a fresh start, possibly after a divorce.
Ms. Tamblyn Watts said that whatever the pitch from a family member, seniors tend to think in terms of family loyalty rather than what makes financial sense.
A suggestion for seniors on how to take a business-like approach to requests for help with a loan: If repaying the loan would in any way jeopardize your financial security, say no. Put another way, don't guarantee or co-sign a loan unless you can afford to give the same amount of money as a gift.
Seniors should be vigilant about financial abuse by investment advisers, contractors and caregivers as well as family members. But it's the latter group that Ms. Tamblyn Watts has her eye on. Her reasoning is that while seniors have been financially responsible, their baby boom children haven't matched that standard in many cases.
"People used to wait until their parents died until they went after the money," she said. "Today, with longevity being what it is and with increased financial pressures, what we're seeing is boomers going after the assets of their parents while they're alive."