Everything about Lending money to children
Do you want to lend money to your children? That can be a great solution for a trip around the world, financial help with a start-up or a second study. And of course for the most common purpose: buying your own home. Certainly with the current prices on the housing market.
If you can miss a substantial amount, why not help a child with the next step in his or her life? Borrowing money from your children is not such a crazy idea. Provided you clearly lay down the agreements and conditions in a contract, preferably notarized. The saying ‘you have to walk with your family, do not act’ can easily be refuted if you look at the private loan purely for business purposes.
First of all: borrow money or make a donation?
Borrowing money or a gift, it is both possible. The main differences between lending money to your children or opting for a donation are in the following areas:
- A donation increases your assets. With a loan you keep a claim on the amount and your assets remain intact.
- A loan is tax-free and you are free to pay the amount. Do you donate? In that case, you are liable for tax (with a number of exemptions).
- A loan keeps the mutual relationships pure, while a donation can cause skewed eyes on your other child (ren) or raise expectations.
Make clear agreements
Borrowing money works best if all parties know exactly where they stand. It seems a bit uncomfortable to record business agreements for the ‘act of love’ of lending money, but what if things go differently than expected?
What if a divorce of the parents is planned? If one of the parents dies within the loan period? Other sisters and brothers then become creditors to each other; Something like that rarely does the mutual relationship. Or what if the parents want to interfere too much with the spending objective? After all, whoever pays determine, some parents think.
There may even be scenarios that many people don’t really think about at the start of the situation, or (logically) they don’t want to think about. The death of the borrowing child is such a worst-case scenario. Or bankrupt the supported start-up.
Borrow smart money for your children?
No matter how close or emotionally close you may be to your child, borrowing money is best taken away and you look at the loan purely for business purposes. Make watertight agreements that include every conceivable scenario.
Avoid problems, draw up a loan agreement and have it recorded at the notary. It is best to opt for market-based interest in order to avoid gift tax.