With the current wealth gap between the older US population and their younger family members, many parents (or grandparents, relatives) may find themselves in a situation where they’re loaning money to their loved ones. While it is great to be a position to help your family financially, does that mean that you should help them? Will it cause future issues? In Brian M. Douglas & Associates’ latest blog, we’re sharing some advice on how to serve as the “family banker” without impacting or upsetting your beneficiaries.

Put Some Policies in Place

Even before you cut that first check, you need to think about how much money you are willing to lend, for what purposes, and how it might affect you and your family member. First, how much money are you going to lend? You should take a look at your financial portfolio and figure out how much money you can loan out without putting yourself in financial jeopardy. Second, are you willing to lend your family members money for any purpose or only in certain situations? For example, do you only want to help your family with purchasing a home or paying for school, or are you willing to help them out with any request? Third, you should also consider whether you are going to lend money as-needed or equally among all of your family members? And lastly, how/when are they going to pay you back? Once you have these policies in place, you should communicate them with your family, so they know about your willingness to loan out money and in what circumstances.

Create a Formal Agreement – Write It Down!

One way to serve as the family banker without upsetting your other family members is to make the loan a formal, official agreement. In addition to discussing the amount of the loan, you should also discuss an interest rate (if applicable) and the repayment schedule. The agreement should be documented, with all parties signing and dating the agreement. Putting the loan details on paper can help with the tracking of payments and can also mitigate potential issues with other family members. Once the agreement is formalized, you can talk to your accountant about possible tax ramifications, and even create a print or digital program to collect and track the payments.

Adjust Your Estate Planning Documents Accordingly

If you loan a beneficiary a substantial amount of money, you may want to include some language in your Last Will & Testament that reduces that beneficiary’s inheritance, based on the unpaid balance of that loan. Or, you can also consider adding some language to your will so that your heirs can receive loan payments, should you pass away before the loan is repaid. Having these instructions in your will is another means of preventing future problems between beneficiaries. (For example, those beneficiaries who would find it problematic for a beneficiary who owes money to the estate to also receive an inheritance from that estate). You may also want to protect your interests by asking to be added as a lien holder on the borrower’s property or added as a beneficiary on the borrower’s retirement account or life insurance policy. These additional estate documents can all be adjusted when the loan is paid in full.

Loaning Money vs. Gifting Money

If you, as the family banker, do not want to create a formal loan agreement or adjust your estate planning documents, you can always just give the money to the beneficiary outright. (Note: you may still want to consider the amount of the gift or the purpose of the gift, so as to avoid future issues between beneficiaries). Currently, a person can give up to $15,000 per person, per year without triggering the federal gift tax. This tax does not apply to tuition or paying medical expenses for someone else. Georgia does not have a separate gift tax.

Have Questions? Contact the Estate Planning Attorneys at Brian M. Douglas & Associates.

While it might seem like a challenge to loan money to one family member without upsetting another, with careful provisions in place, you can serve as the “family banker” and also mitigate problems between your beneficiaries. If you have any questions about setting up family loans, adjusting your estate plans, or the federal gift tax, please do not hesitate to reach out. You can contact Brian M. Douglas & Associates at (770) 933-9009.