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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
Some tax-cutting strategies make good financial sense. Other
tax strategies are simply bad ideas, often because tax considerations are
allowed to override basic economics.
Here's one example of the tax tail wagging the economic dog.
Let's say that you run an unincorporated consulting business. You want some
additional tax write-offs, so you decide to buy $10,000 of office furniture
that you don't really need. If you're in the 28% tax bracket and you deduct the
entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000).
But even after the tax break, you'll still be out of pocket $7,200 ($10,000
minus $2,800) - and stuck with furniture that you don't really need.
There are other situations in which people often focus on
tax considerations and ignore the bigger financial picture. For example:
* Someone increases the size of a home mortgage, solely to
get a larger tax deduction for mortgage interest.
* A homeowner hesitates to pay off a mortgage, just to keep
the interest deduction.
* Someone turns down extra income, because it might
"push them into a higher tax bracket."
* An investor holds an appreciated asset indefinitely,
solely to avoid paying the capital gains tax.
Tax-cutting strategies are usually part of a bigger
financial picture. If you are planning any tax-related moves, we can help make
sure that everything stays in focus. For assistance, give us a call.
Last Updated by Tax on 2013-11-27 01:00:31 PM