Asset Protection

Gift Or Loan

Some people choose to protect their assets through a gift or loan. Find out how this can work as well as how to protect your assets when being approached for a gift or loan.

While you may not realize it, an important aspect of protecting your assets is when you give a gift or loan to a family member. The old saying: “Never do business with family or friends,” is one that few people actually follow. This means that you can find yourself feeling the need to protect your assets from these very people. This can be due to intuition, the general need to be protective of your property, or through a bad experience.

This means that you must determine, when dealing with intra-family finances, whether a gift or a loan will offer the best protection for you. Even if you aren’t concerned as much with protecting your assets from family members, you may still want to protect yourself from the tension that can arise when mixing family and finances.

Bad feelings and tax problems often accompany intra-family gifts and loans. Emotions cloud better judgment. Pursuing traditional legal remedies, when things do not work out, seldom seem appropriate when dealing with family. Suing a family member for damages, or breach of contract, is like having your teeth drilled without Novocain. Where do you draw the line? Under what conditions do you lend money or provide financial assistance to family while still protecting your own assets?

A Successful Strategy

A successful strategy for dealing with the complex issues of intra-family finances begins with deep personal introspection. Identifying your personal feelings about what constitutes acceptable assistance is not easy. You almost have to role play, or act out, various scenarios in your mind to get an understanding of all the potential issues involved. Married couples could struggle to reach an agreement on this critical issue. Only when you understand where you are coming from can you clearly communicate your position to other family members and not feel emotionally blackmailed when a member of the family requests assistance.

Once your philosophy is established you can move to the more cut and dry technical issues. Most importantly, you must decide and document whether the assistance is a loan or a gift. Do not be too casual here. A loan means you expect to be repaid, while a gift is something freely given without the expectation of return. Not only is this critical to keep peace in the family but it is essential to how the IRS treats the transaction.

A Loan Verses a Gift

If your assistance is to be a gift, note that clearly on the check. If the amount is over $11,000, the IRS requires you provide written documentation to classify it as a loan rather than a gift. Without documentation it must be classified as a gift. Gifts in excess of $11,000 require that you file a gift tax return. To avoid a ton of grief, seek competent tax advice whenever an intra-family transfer to any one individual that exceeds $11,000 in any calendar year will be taking place. Doing so can protect your assets and keep you, and the family member you are loaning or giving to, from experiencing unnecessary problems.

If your assistance is to be a legitimate loan, you must not only expect the loan to be repaid but you must: 1) charge a fair market interest rate; and 2) declare the interest on your tax return as income. If you charge less than fair market interest (currently around 4% to 7%) the IRS will charge the interest anyway as income.

An intra-family loan represents a legal obligation. An intra-family loan, like any loan, should be supported by written documentation. The more details you spell out the better. Make certain everyone understands their respective rights and responsibilities—amount loaned, repayment schedule, interest rate charged, collateral provided, etc. In most cases you won't need a lawyer, although it couldn't hurt to use one.

No two requests for financial assistance from family members are ever the same. The emotional issues add an entirely new dimension to, and make us think differently about, our financial affairs. If you find yourself perplexed about a specific intra-family transaction, seek the advice of a trusted yet uninvolved third party. Often they will be able to help since they are not emotionally involved.

The following are tips to remember when considering giving a gift or loan to a family member. These can help protect your relationship, as well as your assets:

• Know the difference between loans and gifts.

• Never be emotionally blackmailed.

• Give only if you can afford to do so.

• Family should only be the "bank" of last resort.

• Consider what happens in case of divorce.

• Document every intra-family transaction.

• If you are married, make sure both spouses agree with all intra-family loans and/or gifts.

• Be willing to walk away. Money is never worth damaging the special relationships that should exist in a family.

If you follow the tips above, a gift or loan within a family can be accomplished without too much trouble or risk to your estate. Always know the laws and follow your instinct and you can successfully accomplish intra-family financial transactions.