No matter the state of the economy, someone’s always asking for a favor, right? When you have a family member asking for a loan or help with another money-related issue, it’s already more complicated than anything you can hammer out with a bank. But Alexis Martin Neely, founder of the Family Wealth Planning Institute and author of Wear Clean Underwear, said that’s just the key – treating it as though it is a bank transaction.
If you feel obligated to help out a family member with a loan, treat it as though it were a transaction with a stranger, Neely said. Approach the deal with a plan of how they will pay it back, how it’s documented and if and what the interest will be.
You can do that without a lawyer. Virgin Money is an example of a service that will handle the transaction, document everything, make sure the payments occur on time and give you the flexibility to renegotiate the terms of the loan (and be prepared to renegotiate if you have to. After all, if your own family can’t bail you out, who can?).
Remember this: Without interest, a loan isn’t a loan in the eyes of the government; it’s a gift. And if the gift is too big, you need to file a gift tax return. Right now, $12,000 is the gifting limit (that will rise to $13,000 in 2009). What that means is that anyone can give away $12,000 to anyone for any reason without filing a tax return. So if the loan is more than that, the onus is on you – the giver – to pay the tax, not the receiver.
Cosigning should also be approached with extreme caution. Carmen is not a fan of cosigning, but sometimes you need to do it to help out a family member or friend. Just know that once you sign the dotted line, the legal responsibility on the asset (house, car, property, etc.) is just as much yours as it is the owner’s. So ask yourself how you will protect your credit if the other person can’t pay, and handle as if it’s yours.