MSU Extension examines loans to family members during COVID-19
If a person is financially secure and willing to lend money to a family member, there are four basic options, according to MSU Extension educators.
BOZEMAN – Amid the pandemic, some Montanans are experiencing unemployment or otherwise need financial help and have turned to friends or relatives for a loan. If approached, individuals have options to consider before making a loan, says Montana State University Extension educators.
The MontGuide “Lending Money to Family Members” discusses how individuals can navigate the sensitive topic.
First, if a person does not have the money to lend or does not feel comfortable making the loan, they should politely, yet firmly, say no, said Marsha Goetting, MSU Extension family economics specialist. A person does not have to explain their answer if they do not feel comfortable doing so.
However, if a person is financially secure and willing to lend money, there are four basic options: make the loan, co-sign a loan, consider the loan as a gift or reduce the family member’s bequest by the loan amount.
“No matter how casual or small the loan, put the verbal agreement into writing,” Goetting said. “Although promissory note forms are available on the web, the services of an attorney to set up a contract to protect both the lender and the borrower may prevent future misunderstandings among family members.”
Co-signing is a legal commitment transferring risk from the institutional lender to the co-signer, Goetting explained. A lender asks for a co-signer when the borrower poses more risk than the lender is otherwise willing to accept. As a co-signer, individuals may have to use their own assets as collateral for the loan.
Goetting said potential co-signers should consider if they are prepared to make payments themselves if their family member is unable to do so. Other things to consider include the potential emotional consequences to the borrower should the co-signer have to repay the loan and whether the relationship will be negatively impacted.
If a person is not confident the loan will be repaid, the loan could instead be a gift to the family member.
“Federal law allows the annual transfer of up to $15,000 without the necessity of filing a federal gift tax return,” said Joel Schumacher, MSU Extension economist. “If you decide to make a gift of a loan requested by a family member, make it clear to the recipient that the money is a gift. Loans between family members are seldom secret, and by making the transaction clear in the beginning, family disagreements could be avoided.”
If it is the intention to subtract the loan from a bequest to the family member upon your death, make the clarification in your will, Goetting said. If there is no will, Montana law does not automatically reduce the bequest to the family member.
For example, say a parent leaves an estate of $90,000 equally divided among their three children. Even if they had previously given one child $20,000 during the pandemic, the child will inherit another $30,000 according to state law. The amount will not be adjusted unless there is a contract or a will clarifying the situation.
“If a family member approaches you about a loan during the pandemic, consider your options carefully,” Goetting said. “Some people find borrowing from family can create guilt, pressure, worry and emotional trauma for everyone involved. For others, family loans have resulted in a sense of family unity and a feeling of satisfaction in helping a family member.”
A copy of “Lending Money to Family Members” is available at https://apps.msuextension.org/montguide/guide.html?sku=MT199323HR. Physical copies are also available at local MSU county or reservation Extension offices.
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