Erickson Financial Solutions Blog
Lending Money to a Family Member
Sometime in your life you may be asked to lend money to a family member – offspring or sibling. There are a few issues to consider. First, can you afford to loan the money and not get it back? Presumably whoever is borrowing the money could not get it elsewhere. If they have tried a bank and were turned down, perhaps the bank has a keener eye for success than you which suggests lending might not be a profitable idea and you may not get your money back.
But banks have been wrong before and you may wish to take a chance anyway. Now comes the issue of interest – what rate will you charge.
As long as the loan is for $10,000 or less, there won't be a problem. However, if the borrowed amount is larger and you do not charge the going rate of interest, the IRS will "impute" interest for you, based on its own assumptions. You'll end up being treated as if you had charged/earned interest, even though you hadn't, and you'll owe tax on that "phantom income" that you didn't receive.
If lending to an offspring, special rules may apply. If the loan is for $100,000 or less, the interest you will be considered to have received annually for tax purposes is limited to the amount of your child's net investment income for the year. And if that amount doesn't exceed $1,000, you can avoid taxable interest income on the intra-family loan. But the IRS may still intercede if it suspects that you're trying to dodge the tax liability.
How do you figure out what the "going rate" for interest is? It depends on several factors, including the type of loan, its length, and the interest rates in your local area. You might be able to charge slightly less than a local bank, but you can't go overboard.
What happens if you do not get paid back? The IRS could determine that the "loan" was always meant to be a gift. To avoid that problem, it's best to have an attorney draft a formal loan document. It should include the usual terms that would be found in a bank loan. For instance, the document will usually indicate:
· The amount of the loan;
· The time allowed for repayment;
· The interest rate structure;
· A description of the collateral securing the loan.
Finally, have the loan document witnessed and notarized. This is the best proof you can have if the IRS ever challenges the deal. Also, keep records showing repayments to demonstrate that the arrangement is a bona fide loan.
This article was written by Steven Erickson based upon material prepared by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice.
ETFs Can Provide Some Genuine Benefits To Investors
ETFs may sound like aliens from the "Star Wars" movies. But they're actually an increasingly popular investment in Missouri and across the nation that offers several potential benefits to investors. The acronym stands for exchange-traded fund. And if you don't already have ETFs in your portfolio, you might want to consider adding some to the mix to provide diversification at a low cost.
ETFs are securities that normally track an index, such as the well-known Standard & Poor's (S&P) 500. They are traded on a public stock exchange, so prices fluctuate throughout each trading day. Because of this liquidity, and the fact that fees associated with the investment are typically reasonable, more investors are opting for ETFs.
Technically, the ETF owns underlying assets—such as stocks, bonds, commodities, or foreign currencies—and this ownership is divided into shares for investors. Therefore, you own the ETF's investments indirectly and your shares represent their market value. Also, any ETF may have dozens or hundreds of underlying securities thereby giving you exposure to many securities rather than just one bond or one stock. Another advantage is the ETFs provide tax advantages in that the typical ETF does not trade its component share as often as standard mutual funds.
What's more, ETFs let you diversify across a wide range of underlying investments, while providing investors with other advantages such as being able to buy short or on margin. And taxable gains aren't passed through to shareholders, although you will be taxed on any gains under the usual rules when you sell an ETF. Lastly, the composition of the ETF changes little year-to-year which means what you buy remains much what it was while you own it. This is unlike a mutual fund that may alter its components considerably even in one year.
We can help you determine whether this investment "creature" is suitable for your situation.
Article rewritten by Steven Erickson from an article provided by Advisor Products.
How You Can Manage Risk Aversion
During the early part of 2017, the stock market was rolling merrily along, with the Dow Jones Industrial Average (DJIA) breaking through the 20,000-point barrier for the first time. Whether the "Trump bump" will fast is anyone's guess, but and some prognosticators are forecasting eventual doom and gloom. In all likelihood, the stock market will continue to experience ups and downs, just like it has throughout its history. The question is what risks are you taking.
Regardless of whether the market is going up or down, or staying relatively stable, your portfolio should reflect your personal aversion to risk. Primarily, there are three types of risk to address in this overall philosophy:
1. Risk of loss of principal: This is the risk of losing the money you initially invested. Say you buy a stock for $1,000 that jumps to $1,200 before it falls back to $900. If you sell the stock at that point, you will have lost $100 of principal.
2. Risk of loss of purchasing power: You may be willing to limp along with modest returns, but you're losing money if the inflation rate exceeds your rate of return. For instance, if you acquire a bank CD paying a 2% annual rate and inflation rises to 3.5%, you're losing 1.5% in the purchasing power of that investment.
3. Risk of outliving your savings: Is your investment plan overly conservative? Remember that the stock market historically has outperformed most comparable investments over long periods, although there are no absolute guarantees. Therefore, you're likely to fare better with a well-devised investment plan than you would if you stuffed your money under a mattress. Otherwise, you might outlive your savings, especially given recent increases in life expectancies.
Risk assessment surveys can provide some insights. Typically, an analysis will reveal that you tend to be either a conservative, moderate, or aggressive investor, within certain ranges. Your portfolio should reflect this characterization.
If you are not able to endure the swings in the market, you may want to fine-tune your investments accordingly, taking into account asset allocation and diversification methods. Again, these strategies do not offer any guarantees, nor do they protect against losses in declining markets, but they remain fundamentally sound.
Other potential ideas are to weight your portfolio more heavily to bonds than you did in your younger days. The technique of "bond laddering," with bonds maturing at different dates, is a variation on this theme. Similarly, conservative investors may emphasize dividend-paying stocks and blue chips, as well as mutual funds and exchange traded funds (ETFs) offering diversification.
Every situation is different. Reach out to us to address your specific concerns.
Material in this article was written by a professional financial journalist for Erickson Financial Solutions, LLC and is not intended as legal or investment advice. © 2017. All Rights Reserved.