If your adult son (or daughter) is having a tough time coming up with money for a down payment on a house or has other financial needs that you are willing to meet for him, before providing the money discuss with him whether the money payment is a gift or a loan. If you intended the money payment to be a loan, put it in writing. One reason to put the loan in writing is to make sure that everyone knows when it is going to be paid back and if there is going to be any interest charged. If you loan money to someone you should discuss and put in writing when it is going to be paid back such as perhaps: (a) upon your demand; (b) if it is a down payment for a house when he sell or refinances the mortgage on his house; (c) on some date specific such as within a year, two years, five years? Often family members do not discuss or put in writing those terms of the loan, but they should.
Another very important reason to put the loan in writing is if the relationship sours, such as if you become estranged to your adult child, or if your adult child is getting a divorce. If now for the first time you are putting in writing that you are demanding the $50,000 you loaned to your son and daughter-in-law to place a down payment on the marital residence they are now dividing in the divorce, you have a tougher argument then if you always had the loan agreement in writing.
On November 17, 2015, the New Hampshire Supreme Court in the case of Steven J. Cohen v. John Raymond noted that a transfer of property including money between family members creates a rebuttable presumption that the gift was intended, with the intent being strongest when the grantee is the wife of the payor or a minor child and less strong in the case of an adult child and weaker in the case when a son or daughter-in-law is involved. If the loan is to both the adult child and the spouse in-law, there can still be a presumption that the money was a gift. If the lending parent has no written loan agreement but is able to show some course of conduct of some partial repayments of the amount owed, that repayment history will certainly be of assistance to show that the money payment was a loan versus a gift and perhaps that partial repayment history may also help bolster the lending parent’s claim as to what the repayment terms were of the loan. Written communication evidencing a loan even without a signed loan agreement may help also such as emails and texts between parties to help demonstrate that there was in fact a loan rather than a gift, but there is nothing better than an actual promissory note that sets for the loan repayment terms.
Lastly, if you decide that the promissory note is ultimately not to be enforced by you, there are ways in your estate planning to address that to minimize or eliminate the potential for gift, estate or income tax related to that loan. Speaking with your accountant and estate planning attorney would make sense, in that you could still preserve the right to collect money you provided to your child and spouse in-law if the relationship between you and them gets estranged, financial situation changes so they can certainly pay back the moneys relatively easily, or there is divorce. You are not required to collect money just because a promissory note was signed by your child and spouse in-law.
J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].