How do you draw the line between a family/friend loan versus a gift? Do you say it’s a gift upfront? Do you say it’s a loan and expect it to be returned? But when it isn’t paid back it’s a “gift”? Does the relationship make a difference between whether it’s a loan or a gift?
My mom was telling me that my uncle was going to loan my cousin the “down payment” for a house they were going to build. It’s a hefty sum, around $80k. Now this “loan” will be at 0% financing, and I guess as long as my cousin needs to pay it back. But my uncle was a bit concerned about “loaning” the money versus just giving it.
My mom’s opinion? Give the money. She said he’d spend too much time criticizing my cousin’s financial choices, like buying a new car, or a taking a vacation, etc if he “loaned” them the money and they didn’t pay it back quickly. The problem?
He’s got 3 kids and he doesn’t really have enough to give all three of them $80k each right now. Maybe after my aunt and uncle die and their home is sold. But that’s the other problem. Is it fair to my cousin’s two siblings that his parents are going to loan him the money to build a home, whereas the other two are single and not buying places currently?
There is such a fine line between giving and loaning money to family it’s hard to walk. I’m not sure what my uncle will do. I believe he’ll end up “loaning” my cousin the money but there will be hell to pay and tension.
As for me? Well I asked my mom if she’d ever loan me that much money. Her answer? I haven’t got that much to lend. Guess I’m SOL.
14 responses so far ↓
1 Jen // Jan 10, 2009 at 10:27 am
That is definitely a delicate issue because he has 2 other kids. My mom was going to loan (this later changed to give) me 60k to help buy an apartment, but I am an only child, so she wouldn’t have to duplicate this with someone else.
2 Fabulously Broke // Jan 10, 2009 at 2:10 pm
Yea, being fair to kids is important because even if they know you love them, they’ll feel like you favour one over the other if you loaned them $80k and not the other 2.
Not only that, when the time comes, they’re going to say something along the lines of: So what, just because they’re older and further along in their lives, they get all the perks?
Good question..
Fabulously Broke in the City
Just a girl trying to find a balance between being a Shopaholic and a Saver…
3 Meg // Jan 10, 2009 at 5:12 pm
He shouldn’t do it unless he’s prepared to do it for his other two kids.
Another issue – if you loan it there should be a formal agreement (a one page promissory note signed by both, dictating the rate and terms of repayment). Otherwise, your uncle needs to be paying gift taxes on the amount that exceeds this year’s exclusion limit ($13,000 for individuals). If he’s ever audited, they will come down hard on that. Plus, if there’s a note and he’s never paid back, then he can deduct it as an investment loss on his taxes.
4 LivingAlmostLarge // Jan 10, 2009 at 6:54 pm
The problem is I think he would do it for the other kids if he could do. But I don’t think he “can” do it for all 3 kwim?
5 fengshui // Jan 10, 2009 at 9:04 pm
“He’s got 3 kids and he doesn’t really have enough to give all three of them $80k each right now. Maybe after my aunt and uncle die and their home is sold. But that’s the other problem. Is it fair to my cousin’s two siblings that his parents are going to loan him the money to build a home, whereas the other two are single and not buying places currently?”
NO, it is NOT fair to the other siblings. I don’t have siblings, but if I did, and I found out that my parents gave my brother $80k and didn’t give me and the other sibling anything, I’d be quite upset.
However, was money spent in the past on the other siblings? Did the other two siblings get their college and weddings paid for and this particular sibling didn’t? If that were the case, then I wouldn’t be upset. It just seems like a LOT of $ to be “giving away”.
I can only hope that I would be able to help my kids out like that someday. I’m SOL too. My parents don’t have $ like that to give away. My inlaws are wealthy beyond comprehension but they are not generous with their money. Oh well.
6 Tim // Jan 10, 2009 at 9:51 pm
some family members gave me money, only to say it was a loan a few years later when they needed money. that pissed me off. i gave them the damn money with interest just to avoid being accused of anything further. if i give family members money now, and i have, i specifically tell them it is a gift and not a loan.
as far as the uncle, he needs to be very careful about loaning money at 0%: if IRS found out, he would be liable for imputed interest and gift taxes, especially since you are talking more than $10k.
in general, lending money to family is simply a bad idea. i won’t do it after my experiences. it’s his money, and his choice.
i question why the cousin can’t do it on his own by waiting. getting a house isn’t the end all especially if he can’t afford it. $80k down payment doesn’t mean that the cousin can afford the home. how long would it take to repay the $80k?
the bottom line is you shouldn’t loan money that you can’t afford to lose. If you draw from that principle, you might as well just give them the money to begin with.
7 LivingAlmostLarge // Jan 10, 2009 at 10:17 pm
No I don’t think so. Mostly because the others haven’t gotten married or bought homes.
I agree I give money and I do not loan money to anyone.
8 SimplyForties // Jan 10, 2009 at 10:22 pm
I borrowed the down payment for my house from my parents. It was $25,000 and was given as a 0% loan. I pay the agreed upon amount every month, without fail. I doubt my parents would have loaned it to me if they couldn’t afford to lose it but there is no way I wouldn’t pay it back. There has never been any tension involved, presumably because I’ve never missed a payment and never will.
I have 4 brothers and sisters. I think we’ve all asked for help at different times and for different reasons. There is no accounting amongst us about what we’ve received versus what anyone else has received. I can’t imagine there would be. If the unthinkable were to happen and my parents were to pass away before my loan was fully repaid, I would expect the outstanding amount of my loan to be subtracted from my portion of their estate. So much for me being the receiver.
On to me being the giver. I’ve read over and over again that you should never give to family what you can’t afford to lose. Although I agree with that in principal, I’m afraid I might have a hard time with it in action. As my son reaches the age of going out on his own, I suspect this may come up sooner rather than later. I’m not yet sure how I’m going to deal with it but I hope I can do it as gracefully as my parents have.
9 Thankful // Jan 12, 2009 at 2:38 pm
As other commenters noted, people should be careful about 0% “loans” among family members. As I understand, the IRS considers these gifts, and the giver needs to pay gift taxes accordingly. To avoid the possibility of problems, it’s best to have a promissory note detailing the terms, and the IRS sets the minimum interest rate that is OK for them not to call it a gift. Not sure what it exactly is, but it’s really low. This low-interest loan would probably be a better way to go, depending on how much the uncle will be able to leave his kids once he dies. As I understand it (not an expert, just speaking from personal experience), monetary gifts while the giver is alive will count against the lifetime giving amount excluded from estate taxes, so an $80K gift may mean that the son will have to pay a larger amount of taxes on his part of what is in the estate, depending on how much money is there (note that this is different when talking about spouses). That is, if the IRS finds out about a 0% loan and decides it’s actually a gift.
10 fern // Jan 12, 2009 at 4:21 pm
I have three siblings, and I know that my mother basically supported one of the others for a period of several years when he was in and out (mostly out) of work. She’s also told me that she’s not distributing things evenly in her will. I’m doing better than the others, and she wants to leave her money to the ones she feels need the boost.
So, speaking as someone who is sort of in the situation, I think that as long as the siblings who aren’t receiving the loan/gift don’t read it as an indication of less affection, there’s no problem with uneven splits. It doesn’t bother me that my mother sees and is responding to differing levels of financial need. I know that she loves all of us.
The only thing that would upset me if the situation you describe was happening in my family would be if I was concerned about my parents’ financial situation. I would be upset with a sibling who accepted a lot of money from a parent if I felt that it was or could become a financial problem for the parent. My mother, at least, is the kind of person who I can imagine getting into financial trouble by being too generous with the people she loves. It would really bother me if I felt like a sibling was taking advantage of her personality to the point at which it harmed her, either immediately or down the road.
11 LAL // Jan 12, 2009 at 5:22 pm
Definitely the biggest problem is if he needs the money in the future and it isn’t there for their care.
This is a huge possibility because my aunt has Multiple Sclerosis.
12 moom // Jan 12, 2009 at 6:24 pm
One way to do this would be to give the money but make it clear that the child is now responsible for helping his siblings with downpayments. Or give each $27k now on condition for only using it to buy a house at some point.
But if the guy needs to borrow the downpayment I’m wondering if he is really taking on too much house in the first place.
13 moom // Jan 12, 2009 at 6:30 pm
PS – when my Dad loaned me money he did it at zero real interest but the money had to be paid back indexed for inflation. The reason he lent the money was that I needed it for grad school and my brother didn’t go to grad school. So to be fair to both children I got this money as a loan.
14 LAL // Jan 12, 2009 at 10:51 pm
True a loan would be good.
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