Best way to lend / give money to family..

July 22, 2005 1:08 PM

FinancialFilter: I am going to help out a family member pay off some credit card debt (over the IRS 10K gift limit.) What is the bet way...

I am not sure if I am going to gift them the money or do it as a loan. My indebted relative wants me to cut them a check and then they a would pay off whatever debts they have (mostly credit card). To make sure the money is used for its intended purpose, I am personally inclined to cut check to the credit card companies directly. What are the issues of me paying off the cards directly, like for instance tax consequences for me or my relative? Besides "don't lend money to family... ", does anyone else have any advice to dispense on this subject?

posted by cowmix to work & money (9 comments total)

Commercial: A friend-of-a-friend started this company, which exists to broker family and personal loans. I've never used the company. There may be more info on their site.
posted by sohcahtoa at 1:18 PM on July 22, 2005

First off, these issues vary from state to state (fed tax, less so). Where do you live? Where does your relative live?

If the credit card company forgave your relative's debt, then he would owe income tax on the amount that was forgiven. This leads me to believe that he would also owe income tax if you paid off his debt--even if you paid the credit card company directly. There may be a way to avoid this tax, especially since he's a relative.

I really doubt the credit card company cares if the check is not from the account holder. My credit card contract allows it. In fact, it's pretty common for parents to pay off their child's card.

For the actual payment, you should write a check payable to the credit card company and give it to your relative. He should send your check to the credit card company in the usual way, exactly as if he was sending in his own check. Since the name on the check is different from the name on the account, it is especially important to write his account number on the check and include the usual payment stub. Don't include a note or explanation--banks hate that. The additional correspondence triggers special processing and greatly increases the liklihood of screwups.

Warning: All of the above statements are guesses based on my reading of my card's contract. This is not a wink-wink just-covering-my-ass disclaimer. You should call your friend's credit card company. They'll tell you how to make the payment. They love it when people make payments.
posted by ryanrs at 1:51 PM on July 22, 2005

I had this same situation a few years back. I don't know about the tax implications, but do yourself, and your relative, a big favor and grab the cards (either close the accounts or at least cut them). For me, spending was an outlet for bigger problems, and when my cards were paid off, I proceeded to re-max them. I used shopping to "cure" depression, which was a problem I only recently got over.

Paying off the cards directly is the best method; creating a budget for your relative and making sure you and s/he monitor their spending together will help prevent any future occurrences. Plus, they could probably use some financial advice from someone who has already managed their finances well.
posted by SeizeTheDay at 1:52 PM on July 22, 2005

My advice is simple--a gift is a gift is a gift--no strings, expectations (implicit or explicit)--give it with love and walk away from it--If it is under 20K I do not believe there are any tax consequences--if it is not a gift it is a loan and I think the notion of an independent intermediary is interesting--I would not loan money on a credit card debt with out collateral and very clear expectations--a loan is a loan and should be treated as a business arrangement with a properly negotiated contract and an absolute expectation for repayment--if you can not bring yourself to treat it as a business arrangement with appropriate terms you may want to consider whether it is a loan or a gift--a loan that in fact becomes a gift is a short road to pain and disappointment
posted by rmhsinc at 2:18 PM on July 22, 2005

If you are giving more than $11,000, it is subject to gift tax which must be paid by you, not the recipient. However, you do have a lifetime unified credit you can charge additional gifts against.
posted by grouse at 2:28 PM on July 22, 2005

On further reading, please ignore the income tax stuff I mentioned in my earlier comment. These tax issues are beyond my knowledge.

You should read IRS Publication 950, Introduction to Estate and Gift Taxes

Are you married? It looks like your wife can also give 11k. As a couple, your combined annual exclusion limit is 22k. I think.
posted by ryanrs at 2:28 PM on July 22, 2005

I don't have a problem with the notion of giving checks already made out to the credit card company. It's a targetted gift, sortof like a gift certificate. Maybe you can give up to the tax limit this year, and then give the rest on January 1. That may solve the issue.
If this is a family intervention type "gift", then I would request the credit cards from the giftee. But if it's a helpful get back on the debt free path gift, then I don't think targetted checks are insulting. Making the check out to American Express as opposed to My Beloved Relative is not attaching strings.
posted by dness2 at 3:21 PM on July 22, 2005

Assuming for argument that the indebted person is your brother, what happens if you give $10K to your brother and $5K to your mom, and your mom gives $5K to your brother as a complete and utter coincidence?
posted by ROU_Xenophobe at 3:48 PM on July 22, 2005

As someone who has owed money to people in the past, I'd really recommend writing the checks out to the credit card companies. Doing so might offend the person receiving the help, but it also ensures that they get the help they need.
posted by drezdn at 4:36 PM on July 22, 2005