There are lots reasons to be a lender or giver. First, you probably want to help out a child, a parent, or perhaps another relative, if you can. Second, lending is a form of investment (you and, say, a child can both come out ahead if you have savings that earn a low rate of return, and the child has credit card debt at a high rate, so the child borrows from you at a rate somewhere in between and pays off the credit cards). Third, if you are wealthy enough that your estate will be subject to federal estate taxes when you die, you can reduce that liability by giving away something while you are still alive. And finally, your kids or other relatives are likely to end up with some of your money anyway, so if you can afford to, why not get the joy of being a gift-giver during your life-time?

There are also reasons not to be a lender or giver. First, you may not be able to afford it, or even if you have the cash on hand right now, you might need to keep that set aside for your own future needs. Second, even a loan could be a loser for you, if you don't charge interest, or the interest you do charge is less than you would make on other investments. Third, family loans are usually not secure; some data indicates that even when family loans come with a written agreement, 14% are never repaid. Fourth, the person who needs the money may be irresponsible and use the funds for unworthy purposes. And finally, a loan or a gift may change the relationship between the parties, with the recipient feeling guilty or unable to repay the favor, and the lender (even the giver) sometimes feeling empowered to meddle in the recipient's affairs.

So if you do decide to make a family loan or a significant financial gift, be smart about the details, whether your motives are entirely loving, or entirely financial, or somewhere in between. Put the terms in writing. This way:

• Both parties have a clear understanding of what is happening.
• There is a record for the future. We not only misunderstand sometimes what one another really means, we also forget over time exactly what we agreed to. Having it in writing can save a lot of arguments down the road.
• You have proof for others. One or more of the parties may die, or become mentally incapacitated, and a written agreement provides proof of the original intentions. This is especially true for gifts. If someone receives a gift, then the giver dies, the giver's heirs may (even through an honest mistake) demand repayment, thinking it was actually a loan - how much grief is saved for everyone if the gift was made in writing! And of course, gifts made for estate planning purposes should always be documented, because the IRS may get involved at some point.

Here are some other issues to think about:

• Do you need a lawyer? Usually not, for a simple one-time gift or loan. Just put the terms in writing, and have both parties sign it. But for anything complicated, including a gift under the Uniform Gifts to Minors Act, or setting up a trust, professional advice is a must.
• If you receive interest on a family loan, is it tax-free? No. Federal income taxes are due. Of course, the government probably won't find out about the loan, but the taxes are due anyway. Furthermore, if you charge an artificially low rate of interest, the government may consider that you actually earned a higher rate (which they define), even though you never received the money, and you will have to pay back taxes on those amounts. But these rules about the size of the interest rate apply only to family loans above $10,000 (or above $100,000, if the recipient has $1,000 or less in investment income).
• Is interest that is paid tax-deductible? Generally not, unless the loan is used for business, investment, or to purchase a home, in which case it may be deductible in full or in part.
• What if the borrower fails to make payments on time? Unless you intend to forgive the debt (at which point it becomes a gift, legally), you should remind the person to whom you loaned the money that payment is late. You don't have to be unpleasant about it, and you might suggest that the terms of the loan be modified if they turn out to be too strenuous - banks do this all the time. But to just let non-payment go unremarked is, in effect, to imply that it doesn't matter; if it persists, a legal argument can be made that the loan has in fact been forgiven and is no longer due. If that is your intention, it is better to do it openly, and get credit for being a great person. If the loan is defaulted on, and you itemize Federal tax deductions, you may be able to deduct the loss. But you will need written proof that the loan was made and that you tried to collect on it, and you may well put the defaulting family member in dutch with the IRS.
• What are the tax consequences of making a gift, or forgiving a loan? A loan becomes a gift if it is forgiven. Gifts above the $13,000/year Federal limit are theoretically taxable. In reality, this almost never has an immediate effect, except that you should fill out IRS Gift Tax Form 709. If, like most people, your estate will never be subject to Federal estate taxes, there will be no tax effect at all, even in the long run.

So should you make a gift or loan to a family member? That’s for you to say, but if you weigh the factors listed here, you can probably figure it out.

Chuck Yanikoski is a retirement adviser who lives and works in Harvard. For more about him, or to contact him directly, visit www.ChuckYRetirement.com.