Trust Planning — Should I loan my son money for a down payment on a home?

From the desk of Will and Trust Lawyer in San Diego, Kristina R. Hess

I recently had a discussion with someone about the pros and cons of loaning children money for down payments on a house.

On the one hand, housing prices in California are very high, and many kids need help getting the cash to be able to purchase that first home.

This can be a very personal decision.  Some from the older school may believe that children should make their own way in life and save up until they can buy a home.

Others believe that with how high housing prices are, as long as the adult child can afford the mortgage payments, it is better to own than rent, and these parents have no qualms about loaning their children money.

But what if it is a second marriage?  A blended family and you have multiple children from both spouses.  If you loan one child money for a home, does that mean you have to loan all of the children the same amount?

What if the children do not pay back the loan?  Then, what?  Should you charge interest?

hmmmm, so many questions.  Many of these questions do not have “right” or “wrong” answers and there are compelling arguments for both sides.  It can be a matter of you and your spouse’s personal philosophy on money and independence and how much of a lending hand you want to give to the next generation.

I think most people would agree that the pendulum on giving to children has swung too far to the left where parents are spoiling children, giving them luxuries freely without them having to work for them.  This abundance is causing a generation to grow up with an entitlement attitude, where there is a lack of gratitude and appreciation for sacrifice and hard work.

Yet, others see that the world that we are living in in some ways is more challenging to achieve economic independence.

You and your spouse need to sit down and talk these issues through and come to a philosophical view as a family and establish ground rules for children.

If you decide to gift the money for a down payment, then, gift it.  You can each give $14,000 per beneficiary per year, so you could make a tax free gift of $28,000 toward a down payment.  This is a simple situation.

If, however, you decide to make a loan that you want the child (and his or her spouse pay back), then, I suggest you document with a simple promissory note.  You can get an online amortization calculator.  So, if you are going to charge say 4% interest on the loan and you want the loan paid back in 5 years, you can amortize the payments.  This is a simple way to create a binding agreement and have your child understand that this is a loan not a gift.

But, when loaning money to family, keep in mind, that you should be willing to forgive the loan.  Is it really worth the destruction of a relationship should your child prove unable to fulfill the obligation?

What happens when the “borrow becomes slave to the lender.”  When you borrow and cannot immediately pay back, the lender may question every expenditure of money.  “Why are you taking a vacation, for example, if you have not paid me back?”

What if you have resentment that starts growing for a failure of the borrower to pay you back?

Are you willing to have these negative emotions grow in your heart and ruin or at least inhibit the healthy connection in your relationship?

I personally have decided to forgive family loans because this is exactly what started to happen in my heart.

I wanted my heart to be free and clean and the only way was to forgive the debt.

You may not share my view, but I think it is worth considering the ramifications.  You don’t want to sue your child for breach of contract.  Right!

So be willing to convert your loan to a gift.  If you aren’t willing to do that, reconsider lending a helping  hand.  The world will not come to an end.  The child can learn the difficult lesson of waiting to buy a home and getting on a savings plan.

Alternatively, if you want it to be a loan, but are not going to worry about repayment, you can always document the loans  you make in your Trust and Estate Plan and have any inheritance offset by the amount of the loans.  This ensures an equalization for all of the other children in the family.

As a mother of three, and one who comes from a family of three children, I understand how important it is to equalize distributions among children.  Gifts from parents and assistance is often equated with love and affection.

What do you think?  Ready to make that down payment gift or loan?

Go for it!

Create Legacies and empower your generations to build wealth and be kind human beings.

Estate Lawyer in San Diego, Kristina R. Hess