Liz Weston

Dear Liz: My husband and I have saved close to $2 million. He is 58, and I am 59. Our son is a hardworking, bright young man awaiting responses to medical school applications. My husband wants to loan him $200,000 to $500,000 to reduce his debt from interest on loans. I want to help too, but I think $200,000 should be the limit.

I want a legal contract to determine when it will be paid back, how much interest we will charge, and so on. My concern is that we are unsure how to set this up and I don’t want a nice gesture to end up causing problems with our son down the road. My husband is still working and has a nominal pension from military retirement.

Answer: The first rule of friends-and-family loans is to offer only what you can afford to lose. Even with all the proper documents, many loans turn into inadvertent gifts when the borrower can’t or won’t make the payments.

So your first stop should be a fee-only financial planner, who can review your entire financial situation, including your retirement plans, and let you know how much you can afford to lend your son.

The exact amount will depend on when your husband plans to stop working, how much you anticipate spending and how much you expect to receive from the pension and from Social Security, among other issues.

The planner also can tell you what interest rate you’ll need to charge to avoid having to file gift tax returns with the IRS.

Once you have that information, you and your husband can work together to determine the size of the loan and the interest rate. You can find promissory note templates online, or you can hire an attorney to draft the actual agreement.