Avoid Family Strife with the Proper Documentation
Times are hard.
Many of our adult children come home to get back on their feet. Many of our clients want to help their family and friends by loaning money or guaranteeing and/or co-signing a loan. This can cause a disaster. Don’t Assume Anything. When adult children come home, there needs to be a “plan” that everybody understands. How long will the child stay? Will the child be responsible to cover any expenses? Will the child be expected to help with maintenance, repairs, cleaning, etc. Discussing these matters up front and openly will help avoid misunderstandings; and memorializing this will avoid arguments later. Sometimes a family counselor is helpful, or even necessary.
Is it a Loan or a Gift?
Many people are “loaning and/or gifting” monies to adult children for a variety of reasons. Please make sure that these money transfers are properly documented. If it is a gift, have a gift letter and file a gift tax return, if required. We have seen too often when a parent dies and one child demands repayment of a “loan”; and the other child insists that it was a “gift.” Feuds break out and families are broken.
If it is a loan, have a Promissory Note or other agreement memorializing the terms. When is it due? What is the interest? What if the parent or child dies? Memories fade and family members can argue in good faith. But, these arguments can destroy your family.
Life Insurance is to “guarantee your guarantee”. Many parents are co-signing college, home and car loans for their children. It is recommended that you require your children to have sufficient life insurance in place, dedicated to paying this/these debts, just in case tragedy strikes. If your child dies, you still have to pay these debts. Insurance can protect your family from further disaster.
You should also have an written understanding that the child will pay the loan on or before the due date. If a payment is late (even by one day), the loan will last longer. The child must tell you immediately if he/she cannot make a payment so that the parent can decide whether or not to cover the payment. The child must sell his/her car or house if he/she cannot make payments timely and regularly.