Time to Face Loan Requests with Ingenuity

Physician's Money Digest, October31 2003, Volume 10, Issue 20

The assumption that doctors havemoney to spare often extends toyour relatives. Consequently, youmay become the bank of choice whenthey need extra cash. Although you maybe inclined to come to the rescue,beware. When you set up shop as a loanmanager, you venture into an area oftendotted with emotional land mines.

Preventative Measures

Defaults on family loans are muchmore common than defaults on traditionalbank loans and mortgages. Unfortunately,whether or not the borrowerfeels guilty about failing to repay theloan seldom makes a difference. Theeffect on the family relationship is usuallythe same: It is irrevocably alteredand often ended.

If you choose to hand out moneywhen a family member comes calling,consider the cash a gift before you writethe check. Ask yourself the followingquestions: Can I accept that I may not berepaid? Can I afford to live without themoney permanently? Answering thesequestions upfront can prevent ugly familywrangles in the future.

If you are unable to afford a gift anduneasy with the idea of providing a loan,try these strategies:

  • Ask for a complete business planwhen a relative asks for a start-up businessloan. This may short-circuit a questionableenterprise.
  • If the loan is for a child, treat it aspart of their inheritance. When youwrite the check for your child's loan,amend your will to subtract the amountof the loan from the child's legacy.
  • Play the dependency card with children.By maintaining your assets now,you may ensure that you will not have tomove in with them in the future.

Physician-Banker

If you agree to a loan, make it as formaland bank-like as possible. At thevery least, draft a promissory note andset up a repayment schedule thatincludes interest. A personal financecomputer program, such as Quicken, cando the job. Use repayment forms tomake the pay schedule even more official. If a payment is missed, call to findout why and what their plan is.

Insist on collateral to back up theloan. If your relative is borrowing moneyto buy a car, your name should appearon the certificate of ownership as a lienholder. That way, the car cannot be soldwithout your consent. Liens on othertangible items can also be used. Theyguarantee that other creditors cannotbenefit from the sale of these objects.

If you make a loan of more than$11,000 ($22,000 from a couple), you willbe subject to taxes, unless you chargethe IRS applicable federal rate of interest(about 3.1% compounded annually). Ifyou charge anything less interest, the IRSwill rule that you should have collectedthe higher rate and tax you on incomeyou never received. In addition, if thefamily member does not make a bonafide attempt to repay the loan, the IRScan claim that it was a gift and make anyamount more than $11,000 subject togift taxes.