Should You Loan Money to a Relative?


Ask Peter Post, the great-grandson of etiquette guru Emily Post, for some advice on how to best handle loaning money to a family member, and he'll emphatically tell you, "Don't."

But even Post, director of the Emily Post Institute in Burlington, Vt., realizes that as the recession goes on and more people lose their jobs, someone will inevitably approach Mom and Dad (or their aunt, uncle, brother or cousin) for some cash.

"We've been asked about it a lot in the past six months," says Post. "It's a real Judge Judy to see how it can go wrong."

Mixing money and family is a sign of the times: According to a 2007 study by Ameriprise Financial (Stock Quote: AMP), 41% of baby boomers have used their savings to assist a family member, while only 28% of their parents said they had helped their children by cosigning a loan.

Yes, a lot can go wrong, but no matter what you decide to do, here are four steps to keep emotion out of a family money request.

1. Consult a financial adviser.
Before you go ahead and write out a check to Uncle Bob, it might be a good idea to ask a professional whether or not you can afford it if he doesn't pay you back.

"A financial adviser can really assist you in deciding whether making a gift or a loan to a relative is a good idea," says Suzanna de Baca, a vice president at Minneapolis-based Ameriprise.

If in fact you can't afford to make the loan, or simply don't want to, it can also help to have consulted an expert when you say no.

"If you know this loan will cause you hardship, you can say, 'I reviewed my plan with my adviser and it's just something I can't do at this time,'" de Baca says.

2. Consider making it a gift
If you want to help your family member, and aren't sure they'll repay you, consider making a gift, de Baca advises. There are tax advantages, with the annual gift-tax exclusion increasing $1,000 this year, to $13,000, and $26,000 for a married couple giving to an individual. That means you can give away that much without reporting it to the IRS. If you're planning to give money to your kids eventually, and they need it now, then now may be the time.

3. Put it in writing—or online.
Write out the terms of the loan: how much it's for, the payback schedule and the interest rate, if applicable.

Even if you don't have a lawyer or financial expert to consult, there are plenty of resources online, including peer to peer lending sites that manage loans between relatives and friends. Virgin Money, a unit of Richard Branson's Virgin Group, can provide resources to make sure your loan is documented. For a higher fee, the company will manage the loan with electronic fund transfers, e-mail reminders and year-end reports.

4. Don't blab to other family members.
Although it's good to bring a third party in for security, don't bring up so-and-so's failure to pay you back during Thanksgiving dinner.

And don't hold a loan over a relative's head when discussing other obligations you might have to them, no matter how tempting that may be.

"This transaction is unique to itself," says Post. "You shouldn't let it affect the things you might or might not do for the other person."




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