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What to consider before lending money to family and friends

 

When your best friend views your nest egg as a source of start-up funds for his latest business venture, or your nephew hits you up for a car loan, your first impulse may be to reach into your bank account to help. But it's a fact that loans to family and friends often end up straining both finances and relationships. As Shakespeare said, "Loan oft loses both itself and friend." In other words, if you lend money to friends, you often don't get paid back, and the friendship itself may disintegrate.

 

It's best to consider a loan to someone you love as an "arm's length" transaction. If you're pondering such a loan, keep the following in mind:

 

* You can just say "no." It's your money, after all. Do you really want to raid an emergency fund or dip into your child's college account to finance a friend's business idea? Think like a bank. It's reasonable to ask tough questions about the person's bank accounts, potential sources of income, planned use of loan proceeds, and spending habits before extending credit.

 

* Consider a gift. If you're comfortable sharing your resources, you may want to provide a monetary gift with no strings attached. In many cases, this is the best solution because neither you nor your friend expect the money to be paid back. Unlike a loan, this type of arrangement can forestall misunderstandings and hurt feelings later on. Of course, you should not give money if doing so would unduly strain your own finances.

 

* Formalize loans. If you decide to lend more than a small amount to a friend or family member, it's generally best to draft a written agreement. This can be as simple as filling out a promissory note (available online or at office supply stores). Such forms spell out the basic terms of the loan -- amount, interest rate, payback period -- and provide some limited protection should you and the borrower end up in small claims court. Another recent innovation is the use of direct lending (also called social lending or peer-to-peer lending) websites to facilitate loans between family and friends. For a fee, such sites can prepare loan documentation, send payment reminders, issue regular reports, even facilitate electronic fund transfers. If the loan involves a significant amount of money, check with your attorney.

 

Remember: Many personal relationships have been damaged when loans go awry. So proceed with caution.

 

04 Oct 2012
Act soon to cut your 2012 taxes

Posted in tax

Time is running out to make tax-saving moves for 2012. Here's a sampling of ideas to consider.

 

* Maximize the contributions to your employer's tax-deferred retirement savings plan, thereby saving taxes immediately and deferring taxes on earnings in your account. Also don't overlook an IRA contribution if you qualify.

 

* If you've held appreciated stock for more than one year, consider donating those shares to charity rather than making cash donations. You'll avoid paying taxes on the stock's appreciation, but can generally claim the full fair market value of the stock as a charitable deduction.

 

* Adjust your withholding. Increase the income tax withheld from your paycheck through year-end to cover extra amounts due from Roth conversions or other taxable income increases in order to avoid underpayment penalties. Alternatively, reducing your withholding to account for an overpayment puts money in your pocket now, instead of next year when you file your return.

 

* Schedule charitable contributions. Cash and checks mailed by year-end count as 2012 deductions, as do credit card charges you make by December 31. Donations of appreciated securities are deductible when you relinquish control. Allow extra time for stock transfers handled by your broker or a mutual fund company.

 

* Make family gifts. For 2012, the annual amount you can give away to any individual, free of gift tax, is $13,000 ($26,000 when you're married and make the gift with your spouse).

 

* Plan for elective health care expenses. Use up the balance in your flexible spending account (FSA) by year-end, and figure out how much you'll contribute in 2013. No FSA? You still have time to set up a health savings account (HSA) and make a deductible contribution.

 

* Remember required minimum distributions. Failing to take a required distribution from your traditional IRA before year-end could cost you 50% of the amount you should have withdrawn.

 

These are just a few of the tax-cutting moves you should review. For help in finding the right moves to make in your particular situation, give us a call.

Last Updated by Noel Dalmacio on 2012-10-04 10:30:00 AM