Intra-Generational Loans: Good Intentions, but All in the Family May Not Always be Good Idea

VANCOUVER, British Columbia – At first glance, it seems like a good idea. Your member, George, wants to earn more money on his savings. His son, Mike, wants to buy a home. So George will loan Mike the money to buy the house and Mike will repay George. The number of such intra-generational loans appears to be growing, although hard data is lacking because such arrangements are often very informal. That, experts say, is the problem – a casual verbal agreement can lead to serious problems. For example, what if Mike loses his job and can’t pay? Or what if he simply decides he has some other priorities for his cash and assumes good old dad will understand? Margaret Hall, acting director of legal research and writing at the University of British Columbia law school, was formerly program director for the Canadian Centre for Elder Law Studies. While there she wrote a long report on financial arrangements between older adults and family members. Is the number of intra-family loans growing? “My sense is that it is, but there’s a paucity of hard information out there,” Hall answers. “One of the problems we’ve identified is that when people do it (make intra-generational loans) they tend not to write anything down. Sometimes they’re not even very explicit about what this arrangement is supposed to do. “One party has expectations about when the money will be repaid and whether interest will be involved. The other party may have totally different expectations, maybe even thinking they never have to pay it back.” Hall and others shy away from urging people involved in intra-generational loans to see a lawyer, because frankly they figure people will ignore that advice. So as part of her report she developed a simple form to encourage people to at least put the basics in writing. The idea is to clarify for everyone what the arrangements are. Each party knows what the other one thinks is going on. It also makes it clear whether the money gets repaid if one of the parties dies. “A key recommendation for us was to raise consciousness within lending institutions, both banks and credit unions, about what’s going on. There might be a need to be sensitive that the parent there ready to sign a form might not understand the level of risk. They might need to have that explained to them,” Hall notes. “They might need to be alone to have that information explained to them, because if the son or daughter is there they might think the son or daughter will believe the parent has no confidence in them if they don’t sign. They might not want to ask certain questions in front of their child.” When Hall contacted lending institutions they seemed wary, perhaps concerned this was an effort to launch some new regulations. But Hall believes financial institutions should welcome some very clear statements of their responsibilities. “Let’s say mom serves as guarantor for a loan to her son Bob. Bob, for whatever reason, can’t make the payments. The credit union or bank comes to mom. Mom could argue the guarantee is not enforceable. She has several legal arguments, but probably the most potent one is undue influence, that it wasn’t a free decision and a reasonable lender should have been aware of this,” Hall says. She advises anyone considering an intra-generational loan to look at all the alternatives and talk thoroughly and frankly with an objective person who has their interest in mind. A cooling-off period of 10 days is also a good idea. People may turn to their financial counselor when deciding whether to loan money to a relative. Those counselors don’t want to violate client confidentiality by talking about actual situations they have encountered. But one counselor in California talked to Credit Union Times anonymously. She has indeed noticed that with house prices soaring in California, more and more people have acquired substantial real estate equity and are lending money to their children – “not always in the right way and not always for the right reasons. Unfortunately, the younger group of people aren’t always as responsible,” she adds. “The biggest part of the counseling we do is to caution clients who would go to the ends of the earth for their children but are putting their own financial future at risk. Money changes personalities. Unfortunately we see that a lot in the estate planning we handle. The daughter-in-law, son-in-law or other non-blood relative is standing there with their hand out.” As far as she is concerned, any intra-generational loans should involve at least three parties – an attorney, a financial advisor and an accountant. There are tax implications that can dramatically affect the parent. If the parent makes a loan charging little or no interest, the government may consider it a gift. “I encourage clients to teach their children responsibility,” she says. “Counseling does become part of it.” A credit union may be able to point out the son or daughter does qualify for a loan and doesn’t need money from the parent after all. -