Transmenu powered by JoomlArt.com - Mambo Joomla Professional Templates Club

 “I hate to ask you this,” the plea might go. “But we have no choice. I lost my job last year and haven’t been able to find anything. We’ve maxed out our credit cards and are behind on the mortgage, and junior needs braces. Could you lend us a few thousand dollars? I promise we’ll pay you back as soon as we can.”

What do you do? Sidney Kess, a New York tax lawyer and accountant, told a continuing professional education session sponsored by the American Institute of Certified Public Accountants that if you make that loan, “You can kiss that money goodbye.”

But if you want to help your caller, out of compassion, said Mr. Kess and other experts in personal finance, tax law and human relations, there is a lot to consider, and no one-size-fits-all answer. They offered these ideas to help you make a sound decision, perhaps by giving, not lending, and to avoid hurt feelings or recriminations later.

In the case of a parent and an adult child, for example, “I suspect the relationship is more important than the money,” said Dr. Elizabeth S. Wilson, a psychiatrist in Holmdel, N.J. Therefore, if a loan is unrealistic in the child’s circumstances and the parents can afford to help in a crisis, “I’d make it a gift,” she said.

In one family she knew, Dr. Wilson said, the parents had lent their daughter money to buy a condominium after she graduated and started working. She repaid them each month, but when she lost her job, the parents forgave the loan payments until she could find a new job.

In another case, she said, a son spent most of his own money on a Corvette and ran up credit card bills. Then he wanted help. The best way to help him, as with many people in dire straits, was to send him for credit counseling, she said.

Dr. Wilson said that over the years she had seen many patients who were burdened by heavy debts, and she referred many of them to a nonprofit agency for credit counseling. The fee was nominal, and the patients benefited greatly from learning to make realistic budgeting decisions. Counselors also worked with them and their creditors to consolidate debt and get lower interest rates, improving monthly cash flow. In many cases profligate spenders had to cut up their credit cards.

But people seeking such counseling should be careful. Many for-profit services charge high fees, and there are even outright scams. To search for a reputable agency, check with the Better Business Bureau (bbb.org) and also find out if the agency is licensed by state authorities and is a nonprofit.

Mr. Kess said that many people need ed both financial assistance and financial counseling. “It is best to get an independent party to do the analysis,” he said. Sitting down and examining the personal finances of a family member can be stressful and lead to resentments, he said, as can misunderstandings or delusions on either side that a loan will be repaid.

In some situations, a family loan is reasonable, said Mark T. Nash, a partner in the Dallas office of PricewaterhouseCoopers. The ultrawealthy have long used family loans to transfer money from one generation to the next, he said. An older family member lends money to a younger one at a low interest rate. The younger one invests it for a higher rate of return and eventually repays the loan. Thus, the appreciation goes to the younger person and stays out of the estate of the elder person.

In cases of financial stress, similar loans can be used if the assets to back them exist. Mr. Nash described a case in which a man was terminally ill. Insurance covered his medical costs but not the around-the-clock care he needed, so his wife took a leave from her job to look after him. They had a nice house but no current income for living expenses. The solution was a mortgage from a family member with monthly payments on only the interest; the principal was due in three years. By then the wife would be back at work and able to pay off the mortgage.

Mr. Nash cautioned that “the Internal Revenue Service is going to be predisposed to think of a loan as a gift, but there are steps you can take to make it a loan.” One is to sign an agreement for any loan of $10,000 or more, with interest paid and taxes paid on that interest. At present the minimum I.R.S. interest rates range from 0.72 percent annually for loans of three years or less to 4.44 percent annually for long-term loans.

The loan agreement must reflect a realistic expectation that the loan will be repaid. If the loan falls in arrears, diligent efforts to collect it must be made before it is written off. The I.R.S. has the right to challenge such loans, so the taxpayer must show appropriate documents, Mr. Nash said. Saying “We shook hands on it” is not good enough.

If a loan is not appropriate, the tax code allows any person to make a gift of up to $13,000 a year to each of any number of other people with no gift or estate tax consequences. In addition to the $13,000, you may pay health care bills and education outlays for family members or friends with no gift-tax consequence, provided the payments are made directly to the provider.

“We very much want to help those we care about,” Mr. Nash said. But when a relative has been grossly irresponsible, he said, “sometimes you need to have tough love.”

This article originally appeared in The New York Times.

Email (will not be published)

Name

Title

Comment
 remaining characters

Post