Lending money to family is a really bad idea

moneySome ideas are just plain bad, and you usually know a bad idea when you hear it. One of my favorites, which is getting some media buzz lately, is this notion of feasting on sushi at your local filling station. Another famous bad idea – a land war in China – was offered by the character Vizzini in the movie The Princess Bride.

Of course, we can always count on our U.S. government to contribute its fair share of bad ideas. How about the $3 million spent to assess how sick shrimp perform on a treadmill, or the $2.5 million spent on a U.S. Census commercial that appeared during the Super Bowl.

These bad ideas may cause us to shake our heads, but we can choose to ignore them. One bad idea, however, is commonly presented to many people over age 55 at one time or another and it often cannot be ignored. The question may be popped during a nervous phone call, or at dinner. When asked this question, you might experience cold shivers down your spine.

“Hey, Uncle Mike, it’s your favorite nephew, Rick. Could you lend me $20 grand? I’ll pay you back.”

Every fiber of your being is screaming, “NO…..!” And you would be right! Lending money to family members is a really bad idea.

The first reaction is usually, “Why me?” That’s easy. Family members think you have money…to burn…or at least lend.

Of course, we all want to be “good people,” generous to a fault and take care of our family. But be forewarned: lending money to family is, more often than not, a sure-fire way to wreck more than just one relationship within what may once have been a copacetic family unit.

What if nephew Rick cannot, or will not pay you back? He’s going to dodge you like crazy and if he’s in your bloodline, your husband/ wife is not going to be too happy either. Other family members can be drawn into a fray that is simply not going to have a happy ending.

Also, consider this: you are probably being asked because you are the “bank of last resort.” If Nephew Rick was creditworthy, he would have gone to a bank or drawn on a credit card. That, in and of itself, should tell you a lot. Nephew Rick has run out of options and ideas and you’re “it.”

OK, so you want to help him, even though I tried to dissuade you. If you’re going to play “banker,” be a real banker and GET IT IN WRITING! This includes specific amounts, terms and an AGREEMENT. Understand the tough reality going into this deal – to get paid back, you might have to sue Nephew Rick.

An agreement should include:
1. The amount written in numerals and words, just like a check.
2. A specific date the loan will be paid back.
3. The interest rate. You must have interest or the IRS may deem it a “gift” and you may have to pay a “gift tax.”
4. Detailed payment plan. Is it amortized, or a balloon, or interest only?
5. Penalties for not meeting the terms.

If Nephew Rick doesn’t pay you back, you may be able to write off the loan as a bad debt, but you might have to show all efforts made to collect. If you are not prepared to sue your nephew, you may not be able to take that deduction.

Let me tell you this, from experience. If Rick is offended by having to sign the agreement, he probably does not intend on paying you back anyway. Then, you might as well make it a gift and skip the grief.

I suggest saving this article and keeping it somewhere safe. Then, when Nephew Rick asks for a loan, have him read this column. Your concerns might sink in better coming from me, and it will show that you mean business. Michael Hickey writes on matters of finance, consolidating and sharing sound advice from some of the best minds in the business.

Michael is a freelance writer/contributor from Texas that has lived in SE Florida for 20 years. He may be reached at Michael.Hickey@WordsmithUnlimited.com

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