by Lisa Collins | November 8, 2013
Some would say it is never a good idea to do business with family. But that is just what a loan to a family member is. The problem is, it is usually not seen as a business transaction (by at least one of the parties). Because of the family relationship, it is dealt with more casually. But it is because of that family relationship that more formality and scrutiny is often warranted.
Lending money to a family member can be one of the quickest and surest ways to damage the relationship with that person. If it is not repaid on time, the lender may not feel free to ask for repayment and would not be prepared to take legal action. They would be afraid about how this would impact their relationship with that family member. And perhaps with the lack of formality, the borrower may just be hoping that the lender will just never seek repayment (effectively making it a gift, which may have been the borrower’s hopeful intention all along). This will breed resentment and conflict.
Also, there is always concern about the consequences of other family members becoming aware of the loan (and/or the failure to repay). They may feel that this is not fair and allegations of favoritism may arise. It can affect their relationships with both the lender and the borrower.
And when the family member making the loan is elderly, there is greater potential for misunderstanding or diminished judgment about whether the loan is a good idea. They are also more susceptible to undue pressure or influence. This is particularly the case where the family member receiving the loan also has some involvement in looking after the elderly person’s financial affairs.
“Get it in writing” is the best advice when a family member is loaning money to another. It brings some business reality to the situation and goes a long way to avoiding misunderstanding and disputes in the future. This will also make it easier for the attorneys under a power of attorney, or executors of the estate, to deal with it in the future. They will have certainty about its nature, as well as all of the details of the loan. They can take it into account in administering the person’s affairs.
So get it in writing. Tell them the lawyer is insisting on it!