These problems are of the first world variety so we can start off by being grateful for them. Now onto the “problem”.

You are generous and want to give a trusted friend or family member some cash.

Handing money over to a trusted friend or family member can (unfortunately) be more complicated than you want it to be. Here are some questions to ask and best practices to consider following:

Gift or loan?

To keep it simple let’s assume you are giving cash in every scenario. If it is truly a gift, no paperwork is needed if the amount given is no more than $15,000 which is the IRS allowed annual exclusion. If the amount is over $15k you are required to file IRS Form 709 with your tax return in the year in which the gift was made. However, if you are using your lifetime exemption, no gift taxes will be owed.  The current lifetime limit is $11.7 million per person. If the amount given is actually a loan, read on.

Get it in Writing

If it is really a loan it is in your best interest to get the terms in writing and signed by you (the lender) and the friend or family member (the borrower).

This will establish the amount, length, and annual interest cost of the loan that both the lender and borrower will need to report for tax purposes. If the borrower runs into financial troubles down the line, this piece of paper will provide help with recouping some or all of your loan.

The larger the amount the more you will want to involve your team of advisors. Not interested in getting them involved? There are services like LoanBack that can be helpful. Our recommendation, always involve your team of professionals because the only thing more expensive than involving your team now is getting them involved later when things go wrong.

Source matters

Always think of downstream consequences when gifting assets. Gifting cash from a savings or checking or another taxable account should have minimal unintended tax consequences.  Need to sell something first? Need to tap your IRA, 401k, or an annuity? Consider tax ramifications before pulling the trigger.

Add it to your estate plan

Any unpaid loans should be incorporated into your estate plan so that final bequests can be adjusted accordingly. You can bake steps into your plan so that any unpaid amount is deducted or perhaps forgiven.

How will other friends and family members react?

For any family with means, especially those with generational wealth, the topic of gifting and inheritance should be discussed during your planned family meetings. We have seen a family fracture for smaller things. You can only do your best, but if you want your children and other family members to have the highest probability of avoiding inter-family disagreements you need to have these conversations while you are still around.  You can use your estate plan to make the choices they are left with easier and to keep different personalities happy.

Uncle Ben had it right, “with great power comes great responsibility”. In this case, with great wealth comes great responsibility. Lean on your team of professionals to help guide you and your family to a positive planning outcome even when you are not going to be here to see it play out. Your family will love you for it.

Happy investing and happy planning.

Marcos