Updating this post – 8/27/2015

FutureAdvisor has been acquired by Blackrock, for me this means that they are no longer to be considered a fiduciary advisor, and instead are simply a conduit for Blackrock to sell more of its proprietary ETFs.  While some of these products are competitive, FutureAdvisor is now a salesperson for them.

Intra-family lending is something that can be a real win/win for family members, it can also, be a complete nightmare, since mixing money and family can be a recipe for disaster. The two things that can go wrong in such situations are that the family members who borrow treat the loan as a lower priority than a regular loan against their home.  From a behaviora finance perspective the primary reason that most of American’s wealth at retirement is in their home (401k accounts are secondary) is that payments are highly prioritized, come out of the paycheck first, and missing them means you can lose your residence and all equity paid into it.

The primary risk with a family loan is that the borrow believes that the lender (a parent or other financially secure relative) would not repossess the property if in default.  This risk is very real to a lender, and really isn’t something that you can offset, the best that you could hope for is to establish documentation that states a lien on the property, and establish automated Payment Processing so that your payments are received from Paychecks prior to it being considered disposable income from the borrower.

The secondary risk with such lending is that the IRS scrutinizes them for potential ‘gifting’, since it could be a way for a parent to pass large amounts of money down through from one generation to the next in order to avoid taxes.  For that reason the IRS has established guidelines for intra-family loans, stating that the interest rate of the loan must be above a certain minimum level, which changes on a monthly basis, these rates are called IRS Applicable Federal Rates (AFRs) and can be found here on the IRS Website, below you can see February and March 2014 rates:

The rate table above was nicely laid out and available on the website of National Family Mortgage, established by Timothy Burke, a former exec with Circle Lending (acquired by Virgin Money) that specializes in facilitating intra-family lending, it seems to be one of the few larger firms that offers this service.

If you do set up an intra-family loan incorrectly, there is a methodology that the IRS will employ to penalize doubly, the interest that the Lender should have received from the borrow using the AFR table will be imputed, it would be considered to be collected and added onto his interest income.  The borrow, who is frequently in a higher tax bracket therefore would pay taxes on ‘what they should have received’ at the higher rate.  The second penalty is that it will be considered a gift, an anything about $14,000 per year gifted would require gift tax.

You can set up an intra-family loan without using a third party like National Family Mortgage, but I would advise doing so under the watchful eye of a Financial Planner, who may bring in a CPA and Attorney to help oversee things, overall your costs may actually be lower by taking this to an expert like this National Family Mortgage than making a DIY one.  Fees from National Family are $725 for establishing the documentation (vital for IRS defense of the loan) and an optional ongoing maintenance charge of around $15 per month for payment processing.

Conclusion

Lending money to family or friends is always a risky play, and no matter how well organized a service is this should not be entered into lightly.  However, if you had already intended to ‘gift’ such money to these family members this could be a way to get it to them faster and allow them to benefit from lower mortgage rates.  Furthermore, you become the bank, and get to collect interest rather than it going to an external company, which over the course of the loan can mean hundreds of thousands of dollars in interest payments ‘staying in the family’.  The Borrower gets a rate below market, and the lender gets a fixed income investment, that can be a win/win.

Note, I didn’t approach National Family mortgage about this article, and it is not approved or compensated by them in any way.

Loyal3 is a stock purchase platform that was founded in 2008.  The thing that makes this company worth taking note of is net positive transaction fees for stock acquisition, I am currently testing the scalability of this system. The platform does have quite extensive limitations, but it could still be an interesting part of an overall strategy.

The limitations are as follows:

• Purchase Limit of $2500 per month, I have not tested this out to see if it is a per transaction (or stock) purchase limit or a monthly account maximum yet.  It is common thinking to assume it would be per account, but sometimes its good to check….Continue Reading

Upromise is an excellent savings program owned by Sallie Mae.  At its core it is designed to create cash back savings that are targeted towards college expenses – either in the form of a 529 College Savings Plan, or to be funneled into Sallie Mae Student Loan payments, however there are also other options, such as linking a high earning (sic) savings account, OR… simply requesting a check.

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Personal Capital is a website that collates your Investment Accounts, from Taxable Brokerages, SEP IRA’s, Keogh’s and 401(k) and provides you with a very clear picture of your current holdings, and suggests improvements to any weaknesses you might have.  In some ways the product is a little like Mint.com in that it gives you a pictorial snapshot of accounts, showing growth, exposure, risk and costs.

My personal investment strategy is shifting from Actively Managed to Passively Managed.  Like many people I started out investing in individual stocks hoping to find stars, and in fairness didn’t have the best success, partly to most of my investing career being since 2000, and that being quite a tough period for the markets.  The upshot of this transition is several stock positions that I am waiting for certain events to occur in order to raise their prices, perhaps it is an emotional attachment, but the fact remains that I feel several of my positions will experience a very positive turn around shortly, and they are also positioned well for acquisition.

Until the time that these stocks do pop, I am migrating my investments over to a Passive Portfolio, focused on low fees and diverse funds; in short any new money that comes into my Investment Accounts is assigned to these new funds, and other money locked in stock is staying put until I see the move I want, then I will shift it in also.

Also, on the journey of my Financial Independence I have gone through several stages of Financial Intelligence.  Initially, after several harsh lessons with individual equities I sought to purchase Funds (sector, dividend etc) in order to hold a diverse mixContinue Reading

It has been about 4 months since I signed up for Social Lending Site Prosper.com, I began with an initial investment of $1,000 that I loaned out to 20 different people in $50 increments.  To read more about how I identified and funded those people please see the original post here:  How to Find and Fund Loans with Prosper.com

When I started the investment I opted to reinvest profits; whenever my repaid balance becomes $50 or higher Prosper.com will automatically select a new lender to loan that $50 to, based upon my initial criteria for risk category and desired Interest Rate – the upshot of which is that I now own 23 Loans (in the form of Notes) with them.Continue Reading