How to Avoid Pitfalls When Loaning Money to a Family Member

It’s either the stuff of nightmares—or a normal, everyday part of life. Financial advisors who cater to wealthy clients say a loan to another family member can be the answer to a lot of problems, but caution that they can raise just as many issues as they aim to solve.

“When money’s involved, family isn’t always family. Sometimes money trumps family,” says Jon Ekoniak, a partner at Bordeaux Wealth Advisors, based in Silicon Valley.

Loans between family members—usually, but not always, from an older person to their children or grandchildren—may be best ventured with the help of financial advisors who have experience setting them up. Professional guidance can make the situation more comfortable for family members unaccustomed to transacting business with each other. It’s also safer, as intra-family loans may have implications ranging from taxes to legal issues.

Ekoniak describes one example of parents with a grown daughter who’d married someone who “bounced” from job to job. The young couple wanted to have children, but could only afford a small rental apartment. After nearly a year of agonising over different ways to help the couple, the parents finally decided to simply offer them a loan to buy a house.

“They set up a trust fund and 50% of the income from the trust would be used to pay back the loan,” Ekoniak says. The loan repayments were interest only, at the government’s prevailing “applicable federal rate,” which is the lowest rate the IRS allows for private loans.

It seems straightforward—the “Bank of Mom and Dad” has long been a normal part of young adulthood in America, after all. But there are plenty of possible pitfalls to keep in mind.

If nothing else, loans “should be money that the parent is willing to turn into a gift,” says Mark Weiskind, founding partner at Independence, Ohio-based Fairway Wealth Management. “You’re very unlikely to push hard to collect from your child.”

In some cases, that impulse may be communicated up front, with the lenders explaining that they’d like to receive repayment according to a particular schedule but are flexible if the borrowers can’t make a payment for some reason. But even lenders who do expect their borrowers to stick to a particular repayment schedule need to be flexible, experts say.

What’s more, Weiskind says, “You have to be willing to accept a lower interest rate” on a loan than you might otherwise. In other words, don’t expect to make money from entering into a financing arrangement with a family member.

Parents helping their children should also carefully consider whether they want to tell their other children, if there are any, about the loan. That becomes an even thornier question when money is being loaned between grandparents and grandchildren or aunts and uncles and their niece or nephew, Ekoniak points out.

The bigger question becomes: Does helping one child mean you have to do the same for all the children? “Everyone is thinking, ‘what about me?’” Ekoniak says.

Experts also advise thinking through all the various scenarios that could arise after the loan is agreed to. If the parents are never repaid, do they simply write off the loan as a gift, say by applying the full gift tax exclusion exemption of US$36,000 per couple every year until the balance disappears? If one sibling benefits from the loan but others do not, should it be considered an advance on the inheritance—and do estate documents need to be rewritten to account for the discrepancy?

While the most common uses for intra-family loans do tend to be real estate, Weiskind has also structured several that allow a parent to pass on a share of the family business to children. Either way, it’s important to consider whether the loan has some sort of collateral, he says, and how complicated the documentation needs to be.

“More often than not we see a simple promissory note,” Weiskind says. “I have seen a few instances where they have filed a mortgage on the property just to have protection in case of divorce”—that is, to protect the natural-born child against someone who’s married into the family.

“I’ve never seen a parent foreclose on a child,” Weiskind says with a laugh. But not paying back a loan “could lead to bad blood.”

As if family dynamics weren’t already challenging enough.

Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.

When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.

The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.

But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.

Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.

After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.

“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”

The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.

Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.

In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.

Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.

“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”

Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.

“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.

The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.

In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.

Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.

How to Avoid Pitfalls When Loaning Money to a Family Member

Nvidia’s earnings will test Wall Street’s confidence in the AI boom.