Lending to friend? Charge interest
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Dear Dr. Don,
A longtime friend came into a large amount of money and wants to help me start my realty business. How does she loan me money without paying the outrageous gift taxes on the larger amounts of money?
— William Wonders
Dear William,
It’s not a gift if it’s a loan. As long as she charges you interest at or above the applicable federal rate on the loan, she’s not gifting you anything. These rates are published in the monthly IRS revenue ruling but you can also find them on the IRS Web page “Index of Applicable Federal Rates (AFR) Rulings.”
The rate is based on the term of the loan. Short-term AFRs are used for loans with a term of three years or less. Mid-term AFRs are used for loans with a term of more than three years, but no more than nine years. Long-term AFRs are used for loans with terms longer than nine years.
If I were in your friend’s shoes, I’d require you to sign a written loan agreement and establish that you were solvent when she made the loan. I’d also make the loan out to you, not the business. She would want the ability to demand payment in full if you weren’t making the scheduled payments.
There are a slew of places on the Web to find free or low-cost loan document forms. I landed on LoanBack’s “Blank Promissory Note Forms” and saw a range of forms, one of which is likely to meet your friend’s needs.
