As family gatherings continue to return, there can be plenty of different sources of drama. Of course, as with most other areas of life, money can be a prime source of drama. When assisting clients with estate plans, the purpose is often to leave money to children after a parent has died. But what about when you want to give some money to your children right now. There can be a lot of different reasons for giving a child money. And you also need to choose between giving the money to your kid or loaning it to them with the expectation that it will be repaid. Assuming you are looking to give a loan, getting the terms in writing is very important.
Ways to Help Your Kid Out?
There are many different ways to loan someone some money. Two of the more common ways to do it with your children is either an outright loan or co-signing on a loan from a third party. For each person, the situation is different. But if you are going to co-sign on a loan, it will be a third party giving them the money. The loan will come with a lot of paperwork. If your kid decides to stop paying the loan, as a co-signor, your credit can take a negative hit.
The other common way to accomplish the loan is a direct loan. There are no third parties involved. Although there is no formal credit check involved, you may want to have your kid pull a copy of their credit report so you can see what their financial situation is. You may not know how much financial peril your kid truly is in.
Should It Be in Writing?
The source of most of the headaches in this area is when the loan is not in writing. If you are loaning money to your child, it should be in writing! One of the primary reasons is that if the IRS finds out about your loan, and it’s not in writing, you could end up with some tax issues. A written loan agreement will show the IRS that it is a loan and not a gift. Also, it ensures that you and your kid know the terms of the loan. And to satisfy the IRS, you should also have an interest provision if the loan is for more than $10,000.
While you may think a written contract is “too formal” for your family, it will avoid a lot of headaches in the future…
Next Steps
If you’re thinking of loaning money to your kid and need a contract drawn up or, if you’re already ahead of the curve and have put something together yourselves and just want an attorney to review it, call my office to set up a meeting and we can review the best options for you – (877) AMAYERS.
