Judith McGee, L.H.D., C.F.P.®, and Chair/CEO of McGee Wealth Management offers tips on lending money to children through True Wealth, her new column in Boom Boomers and Beyond Magazine. In the most recent True Wealth column titled ‘Don’t Be The Bank’ McGee points out that while many Gen Xers and Millenials have financial challenges from job scarcity and student loan debt, parents need to make careful choices about lending or gifting money to their kids.
“Don’t drain savings or dip into retirement funds to bail kids out,” McGee advises. Family dynamics are also an important consideration when offering financial help. Jealousy and resentment can build if transparent communication about motivations and details of any financial transaction between family members is not clearly defined. “Lending money must be conducted in a business-like manner, even between family members. Put the terms in writing, agree on a payment schedule and consider an interest rate. This is a money learning opportunity for the child,” McGee says.
McGee also advises that parents should know about the “applicable federal rate”, a rule stating that a minimum rate of interest set by the Treasury must be charged if loaning to a family member, or the parent will risk having to pay a gift tax and possibly have other income tax consequences if the loan is sizeable.
McGee recommends parents collateralize a loan at the bank and have the child borrow from the credit union or bank. The money stays in a Certificate of Deposit and the child fills out a loan application that is secured by the CD. This establishes a credit rating for the child, the loan is 100% secured, and the interest rates are usually around 2% above the bank rate of the CD.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision. This information is not intended as a recommendation to buy or sell any investment referred to herein. You should discuss tax and legal matters with the appropriate professional. Any opinions are those of Judith A. McGee and not necessarily those of RJFS or Raymond James.