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All In The Family

There are a few things you can do to help facilitate loans between a client and a family member.

Not to get all doom-and-gloom on you, but right now we may either be in—or heading towards—a recession. Along with all the larger worrisome implications of such a scenario, the families whom you serve could suffer in a few smaller-but-still-significant ways that you should keep in mind.

First, the older generation may notice that interest rates paid on their “safe” money could start drifting toward zero, while the younger set could find it nearly impossible to borrow funds to go to school, buy a home or start a business. Clever clients with cash will figure out that they can skip the money middleperson and lend directly to needy family members, killing two burdensome birds with one proverbial stone.

But this simple solution can cause considerable consternation among relatives, or—worse yet—with the IRS. Here is what your friendly family lenders need to watch out for, and some ideas for outsourcing most of the dirty details.

Uncle Sam Is In The House

Realistically, your clients can lend money to their children by presenting a check and receiving a promise to pay it back. But there are at least three big reasons families should formalize the terms of the arrangement, especially for five- or six-figure sums.

The first one involves the good people at the IRS, who take a keen interest in intergenerational transfers of money, as well as any ensuing gift-tax liabilities. It’s not the loan itself that typically concerns the tax men and women, but rather whether some or all of the loan is ever forgiven by the lending parent, or if the interest rate charged is below a rate deemed acceptable by the IRS (the “applicable federal rates” are available at

Either event could incur a potential gift tax for your clients who have loaned money to family members—especially if the forgiven amount or foregone interest in a particular year exceeds the $12,000 annual gift-tax exclusion.

The second reason to get the terms of a family loan in writing is that if the money is going to help buy a home, the loan needs to be “secured” by the house in question so that the interest on the loan can qualify as tax-deductible for the borrowers.

The last argument for writing up a proper promissory note is that there will already be more than enough inherent uncertainty in the arrangement. Putting the terms in ink and having it signed by both the borrower and the lender helps to ensure that no party to the agreement will suffer a misunderstanding about its terms.

Who Should Do What?

Confronted with this guidance, your client’s next task is to find someone to handle the paperwork today, as well as any payment tracking in the future. Neither party in the transaction will want to take on this particular job, and with good reason.

You could refer your clients to a qualified attorney who would draw up documents. But that could cost between a few hundred and a few thousand dollars, depending on the complexity of the loan and the lawyer’s compensation rate. And anyway, somebody in the family would still be required to monitor any money repaid for both tax and accounting reasons—not to mention calculating the outstanding balance and the ongoing interest charges.

Something In Between

Enter Virgin Money USA (, a company that offers an unusual service: It helps manage and draft intra-family loans. Founded in 2000, the company was originally known as CircleLending until British entrepreneur Richard Branson purchased it in 2007 and brought it under the Virgin corporate umbrella. On the front page of the company’s website Branson credits his aunt for lending him the money he needed to start his burgeoning empire, and says Virgin Money USA can do the same for other people who want to lend to or borrow from friends and family members.

Today the company offers specific programs for mortgages as well as personal and business loans, which Virgin Money Advisor Channel Manager Mike Micciche says are designed to “help avoid the strife” that often occurs when family members borrow from each other. The depth of initial documents ranges from a simple “Handshake Basic” (preparation of loan documents) for $99, to a “Full Closing with Escrow” mortgage package that might cost a couple thousand dollars.

Besides helping to draft the promissory note and create a payment schedule, Virgin Money USA also offers automatic electronic processing of repayments from the borrower to the lender for $9 per payment. Both borrowers and lenders can track the status of the loan online, as well as receive a year-end report for tax and evaluation purposes. And best of all, your client keeps every penny of interest that the borrower pays.

Tell Everybody … Or Nobody

One other item of interest is that unlike a traditional lending institution, Virgin Money allows borrowers and lenders to decide if an intra-family loan will be reported to the various credit bureaus. That way, borrowers who would like to establish or repair their credit history can benefit from putting the loan (and the hopefully timely repayments) on their credit report.

But others who are concerned that additional borrowing might damage their status with current lenders can prevent the “friend or family” loan from showing up on their credit report, an event that could lead to a substantial drop in their credit score.

Getting Started

Virgin Money welcomes referrals from financial advisors with open arms, providing not only a slew of cheeky guides available for download at the company’s websites, but also a 15-percent discount on all setup fees for people who are sent there by people like you.

And although it may seem counterintuitive to assist a client in taking money out of an account you manage for them so they can lend it to a family member, doing this also gives the family two fewer reasons to be dealing with an asset-grabbing bank.

Besides, who knows—if the economy gets any worse, you may need the services of Virgin Money to help facilitate a little short-term financial assistance from your own mom and pop.

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