How to Avoid Pitfalls When Loaning Money to a Family Member

Loaning money to family members is a generous but potentially risky move. To avoid common pitfalls, it’s crucial to formalize the arrangement with a written agreement detailing the loan amount, repayment schedule, and any interest charged. This not only sets clear expectations but also helps in case of disputes.

Charging a reasonable interest rate, even if it's minimal, can emphasize the seriousness of the loan and ensure compliance with IRS guidelines. It’s equally important to consider the impact on your own finances and be prepared for the possibility that the loan might not be repaid as planned. Always lend an amount you can afford to lose.

Clear communication is key. Discussing terms and expectations openly can prevent misunderstandings and preserve the relationship. Consulting with a financial advisor or lawyer can provide guidance on the legal and tax implications, ensuring the loan is structured correctly. By approaching family loans with the same diligence as any financial transaction, you can protect both your finances and your personal relationships.

For more information see Andrea Riquier "How to Avoid Pitfalls When Loaning Money to a Family Member," Barrons.com, June 11, 2024.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.