Make money lending to relatives.

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Author: Kobliner, Beth

When her son and daughter-in-law needed money to remodel their kitchen last September, Melba Bomash told them to come to mama. Mrs. Bomash, who is 80 and lives in Denver, made a $30,000, 15-year home-equity loan to son William and his wife Pattye, at the competitive rate of 7% with no points. It was a win-win deal: The younger Bomashes, who are both 50 and live in Minneapolis, avoided the hassles of dealing with a bank and saved roughly $1,000 on the rate, points and closing fees. As for Mom: "I had bonds that were recently called, and so the 7% beats the 3% I could have earned in a money-market account."

With interest rates on savings accounts at a two-decade low, growing numbers of people are realizing that lending money to relatives can be profitable. Of course, Ann Landers' columns overflow with readers who have been stiffed by kin. But even if you have trustworthy relatives, you need to structure the loan carefully. Here are some guidelines:

• Make the arrangement businesslike. Draw up a formal note. You can find samples at most banks or office-supply stores. If you're lending more money than you're willing to lose, consider hiring an attorney to draw up the paperwork. If you're making a home loan, make sure you file the deed with the county registrar. "Basically, treat it exactly like a loan made by the bank," says Ross Levin, a Minneapolis financial planner. Moreover, in case your relative does default, you'll need an enforceable loan document to deduct the loss on your income taxes.
• Charge a reasonable rate of interest. Most people try to give relatives a break by charging a lower interest rate. But if you're lending more than $10,000, or if the borrower has more than $1,000 in investment income a year, the IRS sets a minimum for what you must charge. This applicable federal rate (AFR) fluctuates monthly. It recently ranged from 3.83% for loans of less than three years to 6.06% for loans of 10 years or more. If you charge less, you will still be expected to pay tax on the payments plus interest you would have received had you charged the AFR.
• Make the loan to a specific person. If you're helping your daughter start a business with a partner, for example, lend the money to her, not to her firm. That way, if the company folds, half your cash won't wind up in the hands of a hostile ex-partner.

ILLUSTRATION: (LESLIE COBER-GENTRY)

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By Beth Kobliner