Dear Moneyist,
I am 67 years old and have worked as a teacher my whole life. About 7 years ago my daughter came to me in tears saying that their house of 3 years had drywall and was causing the whole family to be sick.
My daughter said she did not know what she and her husband were going to do because she found out that the entire house would have to be gutted. They had also had to replace the air conditioner twice in those 3 years due to Chinese-made drywall.
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She asked if I would loan her $50,000 and we agreed that she would repay me after she and her husband sold the house. The house was fixed and she was happy. Later, my daughter said she would really like to move to a larger house, but said she couldn’t do that and afford to repay me.
In retrospect, I wish I had that our agreement in writing. My daughter did sell the house and I only found out afterwards. I asked her for my $50,000, but she said the Chinese manufacturer of the drywall would have to repay me. They hired a lawyer about 6 years ago to sue the manufacturer about the drywall problem. There has been no progress on the lawsuit.
I don’t know what to do. I don’t want to cause problems between my daughter and her husband and my husband and I, but I am retired as of last year after teaching for 43 years and, although I do not need the money now, I might in the future.
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I would like to set up a repayment plan. I thought about claiming this as a $50,000 bad debt on my income tax this year. I don’t know how that would affect them or us. What do you advise me to do? I do not want to lose a daughter, son-in-law and two grandsons.
Disappointed Mother
Dear Disappointed,
The last line of your letter says it all. It sums up why your daughter was able to ask you for $50,000 knowing that she had no intention of paying you back. It explains why she strung you along with an excuse about selling her home and repaying you from the profit. And it also speaks to her brass neck by telling you to get the money yourself from the Chinese manufacturer. Of course, that makes no sense. It doesn’t have to. She knows she has something that she can leverage against this $50,000 she owes you: Your love for her and her family. And I’m truly sorry for that.
I can’t tell you how far to push this, but I do know that without a signed a promissory note outlining the terms and length of the loan you likely have the weight of the law against you, so you will have to gather all documents and financial transactions related to this loan. Your best chance to see this money is to appeal to your daughter’s sense of ethics by telling her that you will need this money when you get older, and that you would like to arrange a repayment plan and, at that point, introduce a promissory note. I’m not sure whether raising this with her husband and your daughter would help appeal to his/her better nature. It seems like the only chance you have. Failing that, deduct it from her inheritance.
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The Internal Revenue Service has strict rules about lending to a family member. “For a bad debt, you must show that at the time of the transaction you intended to make a loan and not a gift,” according to the IRS. “If you lend money to a relative or friend with the understanding the relative or friend may not repay it, you must consider it as a gift and not as a loan, and you may not deduct it as a bad debt.” If you want to pursue this on either the legal or tax front, talk to a lawyer and compile the paper trail leading to the $50,000 deposit into your daughter’s account. Bankrate.com has a list of states and statutes of limitations regarding personal loans with written and oral contracts.
Ultimately, you may be dependent on your daughter and her husband to do the right thing. You’re right about one thing: Your grandchildren are the innocent parties to this unfortunate affair.
Do you have questions about inheritance, tipping, weddings, family feuds, friends or any tricky issues relating to manners and money? Send them to MarketWatch’s Moneyist and please include the state where you live (no full names will be used).
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