May 25, 2009

Family Loans: Write Them Down

loan schedule.jpg

These days, cash is king -- and some of us just don't have enough of it. If you need to borrow money from a family member to make it through until times are better, you're not alone. But, please, do everyone a favor and be formal about it. That means put the loan in writing, generating a payment schedule, and agreeing on an interest rate that's at least what the government has published (don't worry, it's really low right now). Here's a good overview.

Why is this an estate planning issue? Because if you die unexpectedly, a loan that's been properly handled is much easier for your family to understand and take account of. It's hard enough to sort out family finances when there's been a death, but when important financial transactions have been handled with a nod and a wink, extremely messy situations can result.

Here are the basics:

  1. For any loan over $10,000, make sure you're charging at least the applicable federal rate for the loan. You can find that rate on the IRS's website.
  2. Write down the terms of the loan in a promissory note. Here's a nifty one you can download instantly.
  3. Print out and follow a loan amortization schedule, so you know what the monthly payments will be. This free program will help you figure it out.

For more information on loans between family and friends, read Nolo's article Promissory Notes: Personal Loans to Family and Friends.