PenPenWrites

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Money Matters: Setting limits when you make a loan

06/09/2008

When you lend your grown kids money–and it's a loan, not a gift–you may be risking a whole new set of pressures on your relationship. "What seems straightforward can become a straitjacket if families aren't
careful," a recent news story reports. It asks the key questions: How do you keep family harmony when money is given to one
child and not others? What happens if a son or daughter can't — or
won't — repay the loan?

Some pointers::

1. Call it what it is–a loan or a gift? If you actually
don't expect any payback, give the money unconditionally; otherwise
it's not really a gift, but a debt in grandiose disguise.

A loan is much more
work.

2. Discuss the need.

"If parents are going
to be the bank, they should act like the bank," says a financial adviser. "You've got to treat it
seriously; kids need to understand this is not petty cash."

3. Keep it simple

Draft a document stating how the loan will be structured. Get a
promissory note in writing and set a repayment schedule. "You've got to set
the tone. All the other family members are watching."

4. Don't play favorites

Not all children are the same, but parents generally prefer to keep
things equal among their children.

One solution is to
reduce the borrower's share of a trust or inheritance by the amount of
the loan, which counts as part of your assets.

Final words of advice from a financial adviser: "If you've got a challenging relationship with your
kids, you for sure don't want to be their banker. If you have a good
relationship with your kids, you want to be careful about being their
banker. Nothing can make a good relationship go bad than money."

Posted in buying a house, loans to adult children

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Money Matters: Setting limits when you make a loan

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