How to Avoid Pitfalls When Loaning Money to a Family Member
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How to Avoid Pitfalls When Loaning Money to a Family Member

By ANDREA RIQUIER
Thu, Jun 13, 2024 7:00amGrey Clock 3 min

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.



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The latest edition of an annual UBS wealth report notes that while “the global economy is in the midst of a dramatic structural upheaval,” wealth is growing once again after a downturn through the pandemic.

UBS analyzed income and wealth data from 56 markets, representing “92% of the world’s wealth,” in its Global Wealth Report 2024, released Wednesday. The report’s overarching theme found that global wealth grew by 4.2% in 2023, offsetting a loss of 3% in 2022. Even in the face of continued inflation, adjusted global wealth grew by 8.4%.

However, overall global wealth growth is down, from an annual average of 7% between 2000 and 2010 to just over 4.5% between 2010 and 2023, the report said. This equates to a reduction in global wealth of almost one-third.

The remaining growth seems to be continuing on pace in the world’s most developed and already prosperous nations. In the U.S., average wealth per adult grew by nearly 2.5% and the country accounts for 38%, roughly 22 million, of all millionaires worldwide.

Mainland China came in second with just over 6 million millionaires, followed by 3 million  in the U.K.

The report also took a look at the growing issue of wealth transfer. Over the next 25 years, US$83.5 trillion of global wealth will be transferred to spouses and the next generation. UBS estimates 10% of that will be transferred by women and US$9 trillion will shift between spouses.

Wealth in the Asia-Pacific region grew the most—nearly 177%—since the report began tracking data 15 years ago. The Americas come in second, at nearly 146% growth. Surprisingly, Turkey has enjoyed the most wealth growth per adult of any individual nation in the last 15 years—more than 1,700% in local currency.

The world’s wealthiest class continues to be a small, tightly concentrated group. According to the report, only 12 people hold between US$50 billion and US$100 billion and just 14 people hold US$2 trillion of the world’s wealth. The U.S. and Canada are home to individuals holding 44% of this wealth, while another 25% is held by people in Western Europe.

UBS data suggests that global wealth will continue to grow most in emerging markets, with some countries experiencing millionaire growth of up to 50% over the next five years.

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This stylish family home combines a classic palette and finishes with a flexible floorplan

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