Q. I am retired and my adult child is borrowing money from me. There is nothing in writing and I am worried about getting paid back. I also want to be fair to my other children when I die. How do I handle these issues?
A. This is a common problem in a sluggish economy that is forcing adult children to turn to their aging parents for financial assistance.
A written promissory note should always be used when loaning money to a family member, including a child. While it may seem impersonal and cause some tension, it imposes legal responsibility and, in some cases, dealing with personal responsibility is exactly what the child needs. This also makes sense because an aging parent has taken care of the kids. It’s time to worry about oneself. An aging parent has a retirement and increasing healthcare needs to finance. Children who are forced to borrow money are certainly in no position to help.
In this context the promissory note itself becomes very important. The population is aging. More and more of us will eventually end up in a nursing home and it will need to be financed. In Michigan, nursing home cost in 2015 is more than $8,000 per month on average. Typically, since Medicare doesn’t provide coverage, a person must apply for Medicaid in order to afford this care. The Medicaid rules regarding loans by applicants are strict, particularly regarding repayment terms. If these notes are not set up properly the Medicaid applicant can be deemed to have gifted away assets – resulting in a penalty that would require paying the expensive nursing home bills for a period of time before Medicaid coverage would begin.
Many people recite a loan to an heir in their trust or will and attempt to deduct it from the child’s share. While this is one approach, the promissory note approach is a better foundation for imposing fairness. It can be enforced after death to continue payments to the estate which can then distribute the proceeds accordingly. Medicaid rules in fact prohibit cancellation of the note on death.
It is highly advisable to consult an elder law attorney when considering a loan to a family member to avoid these pitfalls.