offered a loan at 4%, which might turn into a gift...what to do?

[briesas]

My 81 year old father called me tonight and offered me a loan of $15,000 at 4% interest, calculated annually. He is offering this to my sister and I because he gave this same loan to my brother. The terms are -- he only wants the interest, no principal repayments. If he dies, the loan become a gift. (His total estate, if he died today, would be about $750,000 and he has showed us his will -- this would be divided 3 ways between my siblings and I. It's actually in a revocable trust, with the intention of avoiding probate).

I'm an infant mustachian. Started on DR two years ago to pay off debt, and I'm down to 20K in student loans at 3.375 interest, calculated daily (so about $2 a day now).  Have the $1000 emergency fund, a small Roth IRA ($2700), 10K in a 457 and 60K or so in a pension (half of which I can withdraw and roll into an IRA if I leave my employment -- or all of which I can leave to ride in the Wisconsin State Employee Pension system, which is the rare, fully funded state pension system).


I'm not a knowledgeable investor -- I'm just making my way through the Jlcollinsnh stock series now. But here is what I'm thinking -- take the money, invest it in VTSAX and let it sit (in a taxable account). Pay the $600 out of pocket to my father every year. It's a foothold for me into admiral shares -- and it's a hedge against something happening to my father's estate which drains it, like getting sued over a car accident. Continue chunking away at my plan to 1)payoff student loans, 2)build up actual emergency fund and 3)save up a down payment over the next few years.

Does this make sense? 




 

[Duke03]

Normally I'd say not to take the loan, but your brother has already committed the deadly sin of mixing family, money, loans, and business and your sister is about to.  My advice to you is that if you don't take the 15k you are going to be screwed out of 15k somewhere down the road when it comes time to spilt you're fathers assets.  Trust me I've seen it happen plenty of times.  You're brother and sister will want to split everything by 1/3 and will forget about the 15k you didn't get and they will have the Will to back them up.

[briesas]

Normally I'd say not to take the loan, but your brother has already committed the deadly sin of mixing family, money, loans, and business and your sister is about to.  My advice to you is that if you don't take the 15k you are going to be screwed out of 15k somewhere down the road when it comes time to spilt you're fathers assets.  Trust me I've seen it happen plenty of times.  You're brother and sister will want to split everything by 1/3 and will forget about the 15k you didn't get and they will have the Will to back them up.

Good thought, thanks.  I was also thinking of waiting to find out if my sister takes the loan -- and if she doesn't neither will I.

I trust my father and my brother 100%. With my sister -- it would definitely turn uncomfortable down the road.

[mxt0133]

Take the money, say thank you and make sure to pay your dad on time.  Depending on your tax bracket you could use the 15K to for living expenses and max out your 457 to save on taxes if you are not doing so already.  It could be an extra grand or two that can be allow to grow in the 457 account..

EDIT:  You can use this tool to see how much you will save in taxes by increasing your 457 contributions and using the 15K to cover living expenses.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

[briesas]

That absolutely hits on the crux of the matter -- I don't understand much about tax advantaged accounts and their role in FI. (My 457 is mostly a roth,  though I have the choice of roth or not for whatever I put into it going forward. ). I am in a 25% tax bracket, and my only deduction (other than for myself, obviously) is my student loan interest -- so I pay a fair bit of taxes (7300 on 46000 AGI in 2016.)

That said -- if I take the money -- I want to keep it available, rather than spend it (or put it into an account where I can't take it back out) and truly be on the hook for an extra 15k. It's still a loan until my father passes -- and who knows what he might need before that happens? So that makes the 457 an uncomfortable option for me.

[simonsez]

Your student loan interest % is already lower than the loan being offered.  You seem to be in alright shape and will only improve now that you're on your way with finances.

I'd tell him you appreciate being offered the same deal but politely decline.  Yeah you could be "screwing" your future self out of some inheritance but you get zero headache and this isn't life-changing/making money.

If this was a bank rather than a family member, it might be different - but there is some serious negative potential here.

[Heroes821]

If you take the loan, I would suggest bumping your 1k emergency fund up to 5k, which would still leave you 11k to hit Admiral shares in VTSAX.

That being said if a recession hits be aware that your investment number could look smaller for a few years.  It will gain dividends and your number of shares will not decrease (unless you pull money out), but the key is to LEAVE THE INVESTMENT ALONE so it can grow.  If you're dad's stache is about $750k I wouldn't worry too much about needing to fund him especially with 2 other siblings to help out.

[briesas]

Thanks all. I'm not going to take it. The terms are too squishy and why complicate otherwise very good family relationships? The only debt I have now has very straightforward repayment terms -- I spent a long time being a dumbass with money, but I've turned it around in the last couple of years. I don't want squishy, ill defined debt to derail me --

I appreciate the insights you've offered!

[Hotstreak]

Thanks all. I'm not going to take it. The terms are too squishy and why complicate otherwise very good family relationships? The only debt I have now has very straightforward repayment terms -- I spent a long time being a dumbass with money, but I've turned it around in the last couple of years. I don't want squishy, ill defined debt to derail me --

I appreciate the insights you've offered!

Would the loan actually be callable, or are you worried purely for family reasons?  Generally speaking a no-call interest only fixed rate term loan is, like, one of the holy grails of financing.  Personally I don't think I would have it in my constitution to refuse that sort of offer!  I would set up automatic $50/mo payments on my own payday instead of annual $600 payments, utilize the cash, and never think about it again.  Here's the part of the situation I'm not clear on: If your father loans money to all three of you, then he becomes poor and needs assistance at some point in the future, he would ask for help from all three of you correct?  In that circumstance you would help him, regardless of whether or not you took this money from him in 2017?  If that's the case then it's not a question of what will happen years from now, since you would act the same regardless of whether you took the money today, I think?