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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.
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