With the traditional holidays arriving, especially those when everyone is gathered together, it’s the season for friends and family to hit you up for money. We want to help you avoid becoming prey to the awkward conversation when anyone asks you for a loan, no matter who they are. It’s harder to say no when you’re face to face, so here are some practical tips to remember when it comes to loaning money to loved ones.

Is the Money a Loan?

If you decide to loan your money rather than gift it to your loved one, consider drafting documentation that clearly outlines the terms of the loan and what is expected, such as payment due dates, interest rates, and signatures. That way your bases are covered if they do not pay back within a reasonable period of time and you’ll have an avenue of recourse if you so choose. The borrower might also request written receipts to show they have dutifully paid their installments to cover themselves as well. However, you’ll want to remember that if you decide to collect interest on your loan, you’ll need to declare it as income on your taxes.

Is the Money a Gift?

One thing you’ll want to decide if you do happen to reach for your wallet is whether or not the money is a gift. This is an important distinction because if it’s a gift, you’ll want to keep the gift amount in mind when it comes time to do your taxes. If your gift amount is larger than the annual gift allowance (for 2021 that’s $15,000 per person), you’ll need to file a gift tax return. If you do not wish to deal with claiming the gift on your tax return, you’ll have to adjust the gift amount to be less than the allowed annual rate. When you make the decision to give the money as a gift, do not expect that the amount will one day be repaid. A gift is simply that, a gift. Be sure to give it without any strings attached.

Don’t Loan What You Can’t Give

This goes without saying, but do not loan money you can’t afford to give or that you can’t afford to never see again. It is better to give money to friends and family in order to keep the peace within close relations, but if gifting money isn’t possible, never agree to loan money that you can’t afford to give.

Loans and Gifts With Regards to Your Estate

If in the spirit of Thanksgiving, you wish to make sizable gifts to many friends or family members, then it’s wise to make these gifts a part of your annual financial plan and be sure you have the cash on hand with which to gift your loved ones. You’ll want to also include these bequests in your estate plan so as not to appear as if you are avoiding estate taxes by gifting large amounts to several different people.

If you’re making a loan, be sure to draft documents that will help avoid any estate settlements and future disputes should there be an untimely death of either the lender or the borrower. If a loan goes undocumented, your estate could become impacted and family feuds might erupt. It is always best to document loans, even if made to close friends or family for estate tax purposes.

Loans to Friends or Family is a Sticky Business

Ultimately, it’s up to you if you choose to loan your money to friends or family. The bottom line is that you’ll want to document everything, never give more than you can afford, and always remember it is better to gift your money rather than endure the headache and heartaches of getting your money repaid.

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