Helping Out a Family Member in Financial Trouble
When money gets tight, one of the first places many people turn to for help is family. If you want to offer financial assistance to a loved one in need, you might have more options than you realize. Here are seven strategies to consider that let you lend a hand without derailing your own financial plans.
When To Use It: To alleviate a short-term cash flow problem
If a family member is experiencing a one-time cash flow issue, a gift of cash might be the best solution. Determine how much you’re willing to give (in either a lump sum or over time) without compromising your own financial plans. Also, make it clear that this is a one-time gift and not a loan – that can make future interactions less awkward while potentially discouraging regular requests for money.
Baird Recommends: From a tax planning perspective, the amount you’re giving matters: A gift of more than a certain amount (currently $15,000) could generate a gift tax filing requirement.
Give Cash With a Work Repayment Schedule
When To Use It: When the thought of giving money freely makes you uncomfortable
If you're reluctant to make a cash gift, you might offer cash in exchange for work to be done for needed tasks. This arrangement offers several benefits: It can eliminate any feelings of indebtedness, it can help you complete any jobs you’ve been putting off and it can even offer you opportunities to better connect with your family.
Baird Recommends: Be sure to spell out in writing the terms of the arrangement: What work needs to be done and any deadlines. Because you’re presumably giving the cash upfront, you’re potentially deincentivizing timely or quality work – be sure to address that possibility ahead of time.
Offer a Personal Loan
When To Use It: When you’re confident in the family member’s ability to repay
For larger amounts (such as for a down payment on a house or car), you might be more comfortable making a loan instead of a gift. If you go with this option, be sure to spell out the terms on paper and have both parties sign it. Include the amount of the loan, the interest rate, payment due dates and late-payment penalties. Loans of a significant size or with unusually low interest rates can have tax implications, so be sure to consult your accountant.
Baird Recommends: Tread cautiously before deciding to offer a loan. Ask yourself: If your family member defaults on your loan, are you prepared to go to court to recoup your losses?
Cosign a Bank Loan
When To Use It: For loan amounts that are larger than you’re able (or willing) to provide
Cosigning a loan is lending your good credit to the family member applying for the loan. It’s not just facilitating the approval of the loan – you are committing to repay the loan in the event the borrower defaults. Remember: If the bank is requiring a cosigner, it means they’ve already determined that applicant is too great a risk to lend to without one. If the loan becomes delinquent, it negatively affects your credit.
Baird Recommends: Treat any loan you cosign as if you were taking out the loan yourself. Get to know all the terms of the loan, including the repayment schedule. Before agreeing to cosign, you might consider asking to see your family member’s credit report and monthly budget and have the bank notify you immediately if a payment is late.
Assume Certain Monthly Bills
When To Use It: For providing general monthly support, especially from a distance
If a family member comes to you for general help, offering to pay certain monthly expenses is a way to extend financial assistance without exchanging cash. By assuming responsibility for such expenses as insurance, transportation, housing or utilities, you can free up your relative’s cash flow, giving them an opportunity to get back on their feet. It also removes the possibility of their spending your loan on items or expenses it wasn’t intended for.
Baird Recommends: There is an “out of sight, out of mind” risk with this strategy, in that the recipient might forget about these expenses when making budgeting decisions – or you might pay them longer than intended out of habit. Set an end date in your personal calendar as to when you’re ending this support and remind your family member when that time gets close.
Offer Non-Cash Assets
When To Use It: When you have assets other than cash that could provide financial relief
If you feel uncomfortable giving or lending cash to family members, you might have other assets that you’d feel more secure offering. Is the loan to be used as a down payment on a car? Maybe your late spouse’s old car in the garage can tide them over until they’ve saved enough on their own. Do you have a spare room in the house? Maybe it can be used to save money on a storage facility or office space.
Baird Recommends: This strategy can be especially useful when you’re upgrading an asset for yourself. A car that’s worth very little as a trade-in could be very valuable to a niece just starting to drive. For larger gifts or assets, be sure to consult your tax advisor first.
Offer Budgeting Assistance
When To Use It: When an infusion of cash doesn’t solve the problem
Sometimes the answer isn’t a short-term loan or gift. If a loved one is constantly short on cash, it could be they’re having trouble making and sticking to a budget. Instead of a loan they’ll struggle to repay, they might be better served by you sitting down with them and going over their income and expenses. Budgeting is an incredibly important skill that can preclude a lifetime of financial anxiety.
Baird Recommends: While you might not feel you have the experience to advise on monthly budgeting, you know someone who does. Your Baird Financial Advisor is already familiar with your family dynamics and has the expertise to help out.
There’s one last strategy that should also be discussed: Saying “no.” It can be hard to say no to family, and some people are naturally skilled at playing on your sympathies. If the prospect of giving or lending money makes you feel anxious, simply say you’ll need to talk with your Financial Advisor – and then do it. Your Baird Advisor would be happy to review your options with you and provide a buffer if necessary.