“Liza Horvath: Put family loans, terms in writing (The Monterey County Herald)” plus 1 more

Liza Horvath: Put family loans, terms in writing (The Monterey County Herald)

Posted: 07 Dec 2009 01:32 AM PST

With unemployment soaring, children and grandchildren may need financial help now more than ever. Whether funds are needed to save a home from foreclosure, further an education or simply keep food on the table, children and grandchildren may seek access to the Bank of Mom and Dad.

There are several things to consider when a child, grandchild or friend needs money.

First, never, ever put your own financial future at risk. Only lend or give what you can afford to lose.

Even if you expect repayment on a loan, there is always the possibility that you will not be paid back, or in a timely way. Only part with what you can comfortably live without.

For gift purposes in 2009, you can give up to $13,000 to any one person without filing a gift tax return with the IRS. This $13,000 amount is per individual donor and individual donee. A husband and wife together can give $26,000 to a child or to any individual without filing a Gift Tax Return with the IRS. The gift and estate tax laws for 2010 have not been announced yet, but it appears gift amounts will remain the same.

If the financial assistance is a loan, get an agreement in writing, specifically a promissory note. While a note may feel too formal for inter-family loans, remember that the document protects both parties.

A written understanding of the terms of the loan will speak for both parties if something were to happen to either of you. A trustee, spouse or other personal representative will need to

know the terms of the loan so they can enforce it or forgive it, depending on the arrangement.

The note should contain the amount of the loan, repayment schedule (including amounts and interest rate), and how problems will be resolved should a dispute arise. If the borrower is unable to repay the debt, the lender can use the formally-written note to write off the loan as a bad debt for income-tax purposes.

Once the loan is made, keep a schedule of all payments received. You may consider having the note "administered" by a third-party professional. If you are a pushover and your child or grandchild has a sob story every month and no payments are forthcoming, it may be prudent to ask your CPA or attorney to take over the administration.

Better yet, involve your professional adviser at the onset to put the loan documentation together, to handle the bookkeeping of payments received, to provide appropriate tax reporting for interest received, and to pursue missed payments.

Having the loan treated more formally by both you and the borrower keeps you out of the hot seat if the borrower encounters trouble with repayment, and can insulate the family from ill feelings.

Finally, consider the impact a gift or loan has on your estate planning. If your estate plan leaves all assets equally to three children and one of these children has needed "an advance" on his or her inheritance, should the outstanding loan amount or gift reduce the share of your estate passing to that child?

Speak with your attorney so proper reference to the gift or loan can be made in your estate planning documents.

Sharing our bounty with a child in need can be very rewarding for both Mom and Dad — and for the child.

Proper set-up, records, and estate planning keep you on the right side of the IRS and on the right side of your heirs.

Liza Horvath is a trust officer with a local bank and has more than 25 years of experience in the estate planning and trust fields. She can be reached at 915-0272 or liza@montereytrust.com.

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Savvy alternatives to tax refund loans (MSN Money)

Posted: 06 Dec 2009 10:17 PM PST

By Bankrate.com

Just discovered you'll be getting a tax refund? Don't let your enthusiasm to spend that unexpected money get the better of you.

Thanks to today's technology, there's really no need to pay extra for a refund anticipation loan just to get your hands on your tax money a tiny bit sooner. If instant cash is more a desire than a need when considering a quick refund, consider these alternatives:

Go electronic

Abandon the traditional paper return sent via the U.S. mail and file from your computer. In 2008, nearly 90 million taxpayers filed their returns electronically. You'll get the money almost as quickly as you would with a refund anticipation loan, and you won't pay loan fees or interest.

In fact, you may not need to pay for anything. An Internal Revenue Service partnership with tax preparers and software companies offers free online tax preparation and e-filing to some taxpayers. The IRS says that whereas paper filers could wait up to eight weeks for their refunds, most electronic filers can expect their tax checks to show up in their mailboxes in half that time or less. The agency also points out that the error rate is less than 1% for electronic filers.

Direct deposit

Electronic filers who opt for refund direct deposit do even better(.pdf file).

The IRS says the money generally shows up in taxpayer bank accounts in 10 to 14 days. Even if you file the old-fashioned paper way, having your refund deposited directly into a bank account cuts the time you have to wait for your tax cash. Plus, it's added protection against lost or stolen refund checks sent through the mail.

Use store financing

If you want your refund to finance a must-have new appliance, store interest rates usually will be better.

Many stores offer free financing for limited periods. By then, the refund should have arrived, and you can use it to pay off the store credit -- and pay no interest at all.

Impatience usually wins

Ultimately, a refund anticipation loan is a personal preference, not a fiscal issue for taxpayers.

"Theoretically, with electronic filing and quicker turnaround on refunds, the need for tax-anticipation loans has become obsolete," says John L. Stancil, an associate professor of accounting and tax at Florida Southern College in Lakeland. "However, my observation is that they appear to actually be on the increase, as people become more and more impatient to get their refund.

"One sample I saw from a major company who provides these loans through tax preparers disclosed an annual percentage rate of 264% on the loan. All year long, taxpayers have made the government an interest-free loan, and now they are paying 264% to get their own money back a few days quicker."

Companies that offer refund loans, such as H&R Block, are well aware of such impatience, and that's why the loans survive even as electronic filing increases.

The tax-preparation giant notes on its Web site, "Taxpayers choose refund anticipation loans because they can receive money in one to two days, compared to waiting up to 15 days for a tax refund to be directly deposited into their existing bank account or three to eight weeks for a mailed IRS refund check."

Talk back: Should I report a tax cheat?

That pitch definitely appeals to those who value speed over cost.

Recently, larger tax-preparation companies have been offering these impatient customers refund anticipation loans on easy-to-use prepaid debit cards. The ease of a debit card coupled with the draw of an "instant refund" tempt customers looking for a speedy return.

With all the pluses of these promises, many customers fail to see the charges incurred for their impatience. These expenses include tax-preparation fees, account fees and finance charges, as well as the fees of the debit cards, which include charges for ATM withdrawals and balance inquiries.

But if you can squelch your refund appetite for just a few days, then you -- and your bank account -- will be better off.

This article was reported by Kay Bell for Bankrate.com.

Updated Dec. 4, 2009

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Fast loans or credit?

Monday, December 7, 2009