Consider these things before lending money to the family

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Dear Rick

My sister and her husband have been in severe financial distress due to COVID-19. I want to give my sister some money; however, my wife is against it; she thinks we should lend her the money, not give it to her.

To promote harmony at home, I decided to lend the money to my sister instead of giving it to her. I have some questions about it. The first is, if I lose my debt to my sister on the way, are there any tax consequences for me or my sister?

My wife also wants to know what happens if my sister and her husband file for bankruptcy; do we lose money? You should know that we plan to lend $ 50,000 to my sister and her husband, and my wife insists that everything must be written down.

Thanks, Bret

Dear Bret

Rick Bloom

First, I agree with your wife that whenever you lend money to family and friends, it is important that the agreement is put in writing. You don’t want misunderstandings, which can cause family disputes.

There are tax consequences as to whether you and your wife decide to forgive part or all of the loan. If you forgive the debt, you are in effect giving your sister and her husband a gift. Consequently, there are tax consequences on donations.

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