Is Loaning Your Adult Child Money a Good Idea?
During the economic crisis of 2008, many young couples and recent college graduates sought financial assistance from their parents and grandparents. With the tightening of credit, parents loaned their children money to pay student loans, buy a house or start a business. These well intended loans can be explosive problems with estate planning and administering your estate.
We would advise you to avoid loaning money to your family for several reasons. First, loans to children should more appropriately be treated as gifts. Your child may promise to pay the money back but few parents see a full return of their investment. Second, the loan may put your financial health in danger. This is particularly true if you must enter a nursing home or need to pay for long term care. Third, when the loan becomes a gift there is the potential for conflict among your children. Finally, should you seek to enforce payment, your children may withhold access to your grandchildren unless you acquiesce.
If you choose to loan money to a child, treat your children in the same manner a bank or financial institution would treat you. Make your child sign a promissory note and secure the debt with a deed of trust. Next, charge interest and have an amortization schedule. Third, make sure your child is making regular, timely payments. If your child fails to make payments, take action to enforce the debt. However, do not delay enforcement. Your claim may be barred by the statute of limitations if you delay too long.
Loans to children often cause hard feelings between the child receiving the money and their siblings. We would advise against the practice. However, if you chose to loan money to your child, discuss the pros and cons with your estate planning or elder law attorney. Your attorney can adjust your estate plan to account for the loan to help reduce family discord.
We regularly help clients with elder law and estate planning in Chesterfield, Colonial Heights, Dinwiddie, Hopewell, Petersburg, Prince George, or Sussex. Give us a call at (804) 668-5327 or email us at Contact@paulperduelaw.com to schedule a consultation.