Loans to children can be tricky when it comes to keeping the family peace.
Consequently, if you make a loan to one of your adult children, be certain to put it in writing, charge interest and set up a repayment schedule.
If you die before the loan is repaid and without documentation of the loan, your other children may be shortchanged even though you wrote in your Will that your children should inherit equally. The child holding the loan may suddenly “forget” that the loan exists, and your other children may not have any proof that your estate is owed the money.
Particularly if the original loan amount is greater than $14,000, interest should be charged so that tax officials recognize the transfer as a loan rather than a gift. The minimum level of interest that must be charged to avoid classification of the loan as a gift is published each month by the IRS. The minimum rate, which varies based on the length of the loan, is called the “applicable federal rate”.
As the lender, you’ll owe income taxes on the interest you earn.
A lawyer can help you set up and document the loan so as to best keep the family peace.
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