Money and Family; Two Key Precautions

This month I am focusing on lending money to family or close friends. Family dynamics generally are fraught with more conflicts than lending to a friend. Regardless, this week I am giving you two key precautions to take if you decide to go forward with lending money.


First, be willing to charge interest. This is not so you can profit off of someone’s misery, but it could prevent you owing gift taxes (depending upon the amount you are lending) and the need to file a gift tax return. For 2019 you are allowed to gift any individual up to $15,000 without the need to file a gift tax return if indeed you intend for the money to be a gift. If you are going to be lending more than this amount, seriously consider charging interest. However, be sure it is a fair interest. Interest will also indicate that you are serious about being paid back and that the amount is not a gift. It will also show that there is an opportunity cost to lending money.

Second, get it in writing. If you truly expect to be paid back, get all of the details and terms in writing. This is a good way to outline all of the guiding principles and discuss the loan and terms in detail. Getting it in writing will help prevent disputes later on. Otherwise, your loan and the terms could become a matter of your word against the borrower’s. Getting the details regarding amount, timeframe, interest, and default can help resolve misunderstandings later should anything arise. Having the terms in writing is the best way to protect both parties.

Charging interest and getting the agreement in writing is both practical and smart. It documents that the loan is truly a loan and not a gift, and it clarifies the arrangement between lender and borrower. This will help protect both parties and provide a starting point for resolving issues that may arise.

As an independent Certified Financial Planner™, I can help you decide if you should lend money. Contact me and let’s discuss your situation. #talktometuesday #getstarted #HowIcanHelpYou #GetHelp #Hireaplanner #familymoney #lender #CFPPro #savemoney #borrowmoney #lendmoney