I frequently have clients, at different stages in the lending process, come to me to deal with loans to their children. Some clients come to me before they make a loan to a child and others come to me after they have made a loan. Many times, the clients coming to me after they have made the loan to a child is requesting assistance in either getting the money back or equalizing the distribution under their wills to account for a loan that has not been repaid. You will frequently be counseled against making loans to your children because of the potential pitfalls and the family unrest that can result. In many cases, I look at family loans as future gifts and that is okay as long as the parent/lender is prepared for that result.
Although lending to children can be a cause of concern,
Douglas L. Kaune, Esq.
there are occasions when it will be beneficial to both parties. This article outlines some of the positives that can be experienced from such arrangements. The article further outlines some of the practical measures to be taken in order to make sure both parties are protected.
If properly structured, the mortgage loan to a child can be safe and secure for the parents, provide them with a greater income flow, accelerate Medicaid qualification and potentially protect a portion of the loan amount from spending on nursing and long term care. Although it is not the exclusive function of this planning opportunity, we have worked with a number of clients to structure these family loans with significant success in the Medicaid and Elder Law setting.
Generally, the loan to a child can be secured in the same way that a bank would secure a loan to a third party. Not only should a loan agreement be established through a Note, but a mortgage should be created and recorded against real estate owned by the child. The Note can establish the terms of the lending agreement such as interest rate, length of loan and periodic of payment schedule. The parent or parents can collect additional income because the interest rates on the mortgage are likely much better than the rates on a Certificate of Deposit or Money Market Account.
The mortgage recorded against real estate will establish that that the parent or the parent’s estate can be repaid upon the sale of the child’s home if the child has not already repaid the loan. Of course, there must be sufficient equity in the property to repay the loan. It is preferable to have a first position mortgage, but if a child already has a first loan from a Bank then a second mortgage might be your only option. The parent/lender has to be aware that the second mortgage will only be repaid after the first mortgage is paid.
Great care must be taken to follow the legal requirements to ensure you achieve the desired win win situation. I am more than happy to discuss your situation in greater detail and assist you in developing a cohesive plan for you and your child or children. There may be additional Medicaid application and Elder Law planning benefits to establishing the inter-family loan. We will review all of the related issues and benefits when we are together at our initial meeting.
Please contact Douglas L. Kaune, Esquire at 610-933-8069 or at dkaune@utbf.com to discuss the Family Loan concept or other Elder Law, Medicaid, Estate Administration or Estate Planning Asset Protection issues. Doug is the Chairman of the Elder Law section of Unruh, Turner, Burke & Frees, P.C. The Firm’s three offices are located conveniently in West Chester, Phoenixville and Malvern, PA serving the suburban Philadelphia counties of Chester, Montgomery, Delaware, Bucks and Berks.
