From our “Ask a Question” mailbag: I want to loan my son some money at a low rate, but I do not want to create a fight between him and my other children at my death. What do you suggest?
Interfamily loans can become the source of much conflict between the children of a deceased parent. I find the best way to defuse the situation is to document everything very clearly, to keep the family informed about the loan, and to address the loan in your will.
Documenting the loan can be very straightforward and the loan terms can be written out on one or two pages. It is important that the interest being charged and how much has been repaid before your death be easily explained so your other children do not think that their brother is avoiding repaying any part of the debt.
I like to also document in your will that the loan will pass as part of your son’s share of the estate to him or into a protective trust. If you forgive the loan, then he has to report the forgiven portion as income and pay income taxes. If, instead, the note pours into a protective trust, he can repay the loan without reporting income and then the repaid amount is available to him but protected from divorce and creditors.
There are many ways to address this issue, and if you wish to set up a free consolation and give me more facts I can give you more details that will address your unique circumstance.