Loans to Family Members: 5 Questions to Ask Yourself BEFORE Saying Yes
Sometimes those we love need financial help. Life can throw us curveballs and having friends and family to support us is a wonderful thing. But there’s a big difference between picking up the tab at dinner and writing a check for thousands upon thousands of dollars.
So, if you choose to help someone out with your money, consider the following:
- Is this a gift or a loan? If it’s a gift, does it meet the gifting laws? If it’s a loan, consider the taxable consequences. The IRS has rules that make the loan “arms length” so income tax can be considered on the interest you’re supposed to be charging.
- Are their other family members to consider? Maybe it’s a one-time thing, but you could be setting a precedent you don’t want to set. Might you consider gifting to all three kids the same amount that the one needs, just to make things fair?
- What liability are you taking on? If your solution to helping out your family member is to just “purchase for them,” what does another mortgage do for your lending ability or credit score? What if the child doesn’t pay you back? Are you comfortable evicting your new tenant because they decided to pay other bills or expenses and hand out an IOU to Mom and Dad?
- To what end are you willing to help? The majority of our clients have net worth tied up in retirement accounts, businesses or other illiquid assets like their home. How will your help affect your own plan? Are their income tax ramifications or penalties you’ll pay because of your help?
- Finally, if you’ve made a substantial loan, or are on the deed of that property you bought for them, does it make sense to have the loanee insured? While it may not be comfortable to think about, having a life insurance payout available might help alleviate an emotional travesty becoming a financial one, God forbid something happen to them while they were in the process of paying you back.
If it sounds like this a lot to consider, that’s OK. We’ve been through this before and are here to help walk you through these decisions. Give us a call, we’re happy to help align your personal values, vision and wealth.