Most of my blog entries so far have been about IRAs, but here at Sunwest Trust, we do offer a lot of other services. We also offer Individual 401(k)s, escrow servicing and we recently started acting as trustee for Irrevocable Life Insurance Trusts (ILITs). The service that I would like to talk about today is our “Friends and Family Loans” through our escrow servicing department.
Escrow companies can provide a wide variety of services, depending on what State you live in, but here in New Mexico, escrow companies basically provide record keeping services. Two parties draw up a contract that they both agree on and then give it to Sunwest Trust to receive payments and disburse the proceeds to the seller or lender. The purpose of the escrow company is to keep track of the payments, allocate principle and interest and make sure that both parties abide by the terms of the contract.
A “Friends and Family Loan” is a way of essentially using your personal money to act as a bank. As we have discussed in previous blog entries, you cannot use your IRA money to make loans to disqualified parties, which include yourself and lineal family members. However, there are no rules against using your personal money to make loans to friends or family members.
In this type of transaction, an individual would use a promissory note to lend money to a friend, family member or anyone, for that matter. Many people use these “Friends and Family Loans” to lend money to children for a down payment on a house or in place of a mortgage. They can also be used for smaller things, like a loan for college, secondary education or even a car.
You may be wondering why you would need Sunwest Trust to make a loan like this. Well, the truth is, you don’t really need Sunwest Trust or any other escrow company to service the loan for you. What we provide is convenience. We will provide the borrower with payment coupons to make it easy for them to keep track of their payments. We will also keep track of all incoming payments, allocate the principle and interest and provide both parties with year-end statements for tax purposes.
The fees to have Sunwest Trust service a “Friends and Family Loan” are very minimal and are usually paid by the borrower. Fees are based on the payment amount and are added to each payment. It depends on the payment and loan amount, but most fees are less than $15 per payment.
If you have any questions about this service or any other service provided by Sunwest Trust, please feel free to call our office.