Document the Loan

The first step to avoiding trouble is to clearly document that the money is actually a loan, with or without interest. The documentation should also include payment terms and the collateral for the loan, if any. This will avoid conflict about what exactly you agreed to pay. And, if you don't do this, your lender could find himself paying income taxes on interest he never received and gift taxes on money he never gave away.




And, in the long term, the loan could cut into the lender's gift and estate tax exemptions. You don't need a lawyer to draw up the documentation. In fact, you can easily satisfy the IRS with a do-it-yourself document. Try the document-creation software Quicken Family Lawyer, which sells for about $29. It's simple and well worth the price, even if you use it only once.