WSJ Your Money Briefing - When Lending Money to Family and Friends, Treat It Like a Bank Loan

Episode Date: October 28, 2024

Loaning money to family or friends can be risky and create tension, especially when you’re waiting for them to pay you back. ParkBridge Wealth Management’s Jonathan Shenkman tells host Ariana Aspuru how he advises clients to put emotions aside and treat it like a bank loan. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Balance your trading strategy by adding futures. CME Group helps you manage risk and capture opportunities in all market environments. Capitalize on around-the-clock access to highly liquid global futures and options markets across all major asset classes. Visit your online broker and get started. See what adding futures can do for you at cmegroup.com slash podcast. Derivatives are not suitable for all investors and involve the risk of losing more than the amount originally deposited in any profit you might have made.

This is not a recommendation or offer to buy, sell, or retain any specific investment or service. Here's your money briefing for Monday, October 28th. I'm Arianna Espudu for The Wall Street Journal, filling in for JR Whelan. It might be the elephant in the room as the holidays come around. The money you lent your cousin, uncle, or BFF that they haven't paid back yet. Is there a better approach to this awkward situation? One strategy? Act like a bank. It's super, super important. Instead of just saying, listen, my relatives who I know and I love and I want to be on

solid financial footing, here's some money and hopefully you'll pay me back. Hope is not a strategy. It's very important that they have in writing what the payment plan is going to be. Jonathan Schenckman is the president and chief investment officer of Park Bridge Wealth Management. He joins me after the break. to making it a go-to spot. Ecolab Science Certified. Count on a scientific clean. Learn more at sciencecertified.com. What's the best way to lend money to someone you care about? Turns out you might have to start acting like a bank. Jonathan Schenckman is the president

and chief investment officer of Park Bridge Wealth Management. He recently wrote a piece for the Wall Street Journal about lending money. Jonathan, lending money to friends and family can be sticky and it can be awkward. What are some struggles people face when lending money? Well, the biggest thing is, and what makes it so messy, is people don't often know, is it an actual loan or is it a gift? And that's the one big component because when you're lending to a family

compared to a professional relationship, those lines could easily be blurred. And also it's just the family dynamic component of it. Is it gonna ruin your relationship if you see the person who lent money from you going on nice vacations, leasing a new car, going out to eat, is that gonna put some type of strain on the relationship?

So those type of personal connections and the blur between a professional loan and whether it's a gift or not are two things that really get in the way of lending money to family. What groundwork should someone lending money put down to help them later on with those tough situations? It makes sense to have an official contract in place that could closely mirror an actual

loan at a financial institution. And this includes having the terms of the loan, having a timeframe on when people are going to get paid back, it should have the interest rate. If the person doesn't end up paying you back, what type of recourse does the lender have to make them whole? And also, I would have an independent attorney draft a contract just to help keep things professional and keep people honest on both sides. Also, I would have an independent attorney draft a contract just to help keep things professional and keep people honest on both sides.

You mentioned a few things there that I want to touch on, but interest rates, like how do you start setting, you know, rules like this with someone who is your best friend or a cousin or an uncle or something? You have to go to the IRS to see what they permit. And there's something called the applicable federal rates or AFRs as they're known.

And that's what the IRS sets and it comes out on a monthly basis for private loans, for example, between family members. And if you don't set the minimum rate and charge at least that amount, there could be tax implications depending on the size of the loan. So it's very important to keep your eyes out on what those current rates are. They're easily available in the public for everybody to see, but you have to have the minimum rate there so there's no adverse tax ramifications on the loan that you give to a relative. What other rules should people set when lending money? Other rules could be establishing a repayment program. It's super, super important. Instead

of just saying, listen, my relatives who I know and I love and I want to be on solid financial footing, here's some money and hopefully you'll pay me back. Hope is not a strategy. It's very important that they have in writing what the payment plan is going to be and to share certain information with the lender. This means that the lender should also have access to the borrower's credit history so they understand what amount of money they have outstanding. When you talk about doing your research on your family or friends,

how do you do that without making things weird? The whole situation is weird, and it should be weird, and it should feel uncomfortable. Because if you're going to a relative and you need money from them and they're nice enough to give it to you, then that means that no one else is willing to lend money to you. And it should be a weird situation. And that weirdness is what's going to help, hopefully,

keep you honest and on track to pay it back. So I would say embrace the weirdness and having a contract in place and making it official is what's gonna help you stick to the plan. So know that both parties feel weird. One feels weird asking about, hey, are you gonna pay me back? And the other one feels weird about,

I will try to pay you back. It's both parties. Correct, and when you have an agreement in place or a contract in place that keeps it more professional, it may minimize the weirdness because it's more of a business contract, but you see this person at Thanksgiving or at the holiday dinner table, it's still gonna be a little bit of an awkward situation,

but that's the nature of the relationship that the person has gotten themselves into, and the weirdness is gonna keep them on track going forward. How can someone know when it's time to actually take a beat and say no when someone's asking for money? That is the most important part of this whole thing. People need to feel comfortable saying no when someone comes and asks for money.

It's gonna tug at your heartstrings when someone that you know and someone you love, someone in your family needs financial support. But the end of the day, if you lay out what your terms are, which should be all the things that I've mentioned so far, and the person is not on board with sticking to some agreement like this, or doesn't seem committed to paying you back,

then lending them money is not gonna help you. You're not gonna get paid back, and they're not gonna be able to overcome their financial burden. In're not going to get paid back, and they're not going to be able to overcome their financial burden. In your experience talking with clients about this, is there a certain amount of money that you recommend someone start saying, okay, let's make a contract,

like this is enough money that I think that we should, you know, think about how you're going to pay this back. Because, you know, lending money could be, you know, a few grand, or it could be like a hundred bucks here and there. If you could afford to gift the person money, that is a much simpler and cleaner situation because you have no expectations of getting paid back.

Things won't be weird. Many families have an allotted amount of money they give to charity on a regular basis and you could tack that in to amount of money as part of your overall charitable contributions for the year. If you're in a financial position to be able to give the money, I would 100% recommend that over a loan, which is much more complicated.

That's President and Chief Investment Officer of Park Bridge Wealth Management, Jonathan Shenkman. And that's it for your money briefing. This episode is produced by Zoe Kolkin, with supervising producer Melanie Roy. I'm Marianna Espudu for The Wall Street Journal. Thanks for listening.