Helping Family Members During Tough Times—How Far Should You Go?

As the uncertain economy continues, many people might find friends and family members in troubled financial straits and in need of help. Unless you have plenty of money to spare, it’s wise to seek a little advice before writing a check or offering your home or other property.

A financial expert such as a financial planning professional can help you sort out options based on different scenarios, but the important thing is to consider your financial needs first. If financial support is going to endanger your regular contributions to retirement or your child’s education fund, you need to find non-financial means of help or severely limit the monetary commitment you make.

Here are some thoughts on handling such a situation:

Plan the talk first. Remember that this situation is as much about the relationship as about money. The decision to help a family member with money problems requires understanding; lecturing tends not to work so well. But it’s right to encourage the people you want to help to look at their financial situation and if they are in debt trouble of any kind, they should get help. It’s also important that you support them emotionally and have confidence that they will make it through this.

Consider whether you can make monetary support a gift. Actually, this is a good first question in any scenario where you offer help. What happens if you don’t get the money back? For the sake of the relationship involved, it might make sense to think through that possibility. Would the potential loss of money injure you, and worse, will it injure the relationship? If you don’t think you will be repaid would you be willing to consider it a gift?

Should you make your support a loan? There are good and bad aspects to private loans. The good news first is that the terms can be significantly friendlier than what a borrower would qualify for in the open market. For example, the interest rate you charge on the loan can be lower than the borrower would pay a commercial lender. It’s a way to keep money in the family. You may also choose to require little or no collateral, and you may want to extend the repayment period longer than a bank normally would offer. If you ask a lower interest rate, you need to understand that you are making a gift to the person of the amount of the “forgiven” interest. This amount should be deducted from the annual gift exclusion limit, which is $12,000 for 2008.

Then there’s the bad news. A poorly written agreement can lead to missed payments or default. For example, if the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed. In addition, relatives cannot say they weren’t treated fairly.

The best arrangements are formal; that means that they’re written in proper legal language, notarized, and recorded in the county where the property resides. A financial planning professional can talk to both parties about what such loans, particularly real estate loans, can mean for their respective finances. It also makes sense for both parties to visit their respective tax professionals to make sure they know the correct ways to document the loan transaction over time for tax purposes.

Are there nonfinancial solutions? There are other solutions besides writing a check. You may consider opening your home to family if they lose their housing or helping them maintain their home if they can’t afford much beyond their mortgage and other bills. These are not small decisions and will lead to some financial sacrifice on your part; rising utility and food costs will increase your burden. You’ll definitely want to revisit your household budget before you make this commitment.

Help them set a plan. No matter whether you offer a gift or a loan, you might want to work with them to develop a plan that will either return the money to you or put them back on their feet, or both. A financial planner can be a useful intermediary in this process.

Set an endpoint. The thing about blending unconditional love and money is that it can be tough for both parties to move on. It might be wise to set a particular endpoint for financial support at the beginning so both parties know the clock is ticking on a solution. If you’re providing housing, loaning a car, or providing some other non-financial support, it also makes sense to put an expiration date on that assistance so it doesn’t become a permanent situation.

 Article provided by CU Village.com through its Financial Resource Center content product.