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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
The typical investment advice at year-end is to sell losing
stocks to offset gains you have taken for the year. This year that strategy may
just be the wrong way to go. Here's why.
The maximum rate on long-term capital gains is scheduled to
rise from the current 15% to 20% next year. Also scheduled for 2013 is an
increase in the top rate on dividend income from the current 15% to 39.6%.
If you expect these scheduled rates to occur in 2013, it may
make sense to harvest gains before year-end. Remember, wash sale rules do not
apply to gains, so you can repurchase a similar investment immediately. This
tactic may allow you to "reset" your basis for a future sale while
benefiting from current low rates.
What about investment losses? Despite the uncertainty over a
possible increase in tax rates, it's a good bet that some rules -- such as
those covering capital losses -- will not change. When pruning stocks from your
portfolio, keep in mind that capital losses are more valuable when tax rates
are higher. You may want to postpone taking losses until 2013 if you think
rates will be higher next year.
In your investment review, don't overlook the new 3.8%
Medicare surtax that will apply to certain unearned income, including interest,
dividends, capital gains, and passive rental income. If this surtax goes into
effect as scheduled, an individual with adjusted gross income of $200,000 or
more ($250,000 for couples filing jointly) could pay an effective federal
income tax rate of 43.4% on some income.
Individual situations will vary, so consider all the
relevant factors in making your year-end decisions. For assistance in your
analysis, contact our office.
Last Updated by Noel Dalmacio on 2012-11-28 10:18:06 AM