My wife's father died last year and left a decent sized inheritance to my wife and her two brothers. The estate is complex and includes multiple IRAs and two trust funds, so settling the estate has taken longer than expected. The three parties have already received about 1/3 of the inheritance, which we (my wife and I) elected to take in kind and place in an IRA so as not to liquidate the equities in a down market.
One of her brothers entered into a contract to buy a house based on the assumption he would have his share of the full inheritance by now, which turned out to be a bad assumption. This brother approached us and the other sibling and asked us to advance him $50K now and reduce his remaining share of the inheritance by the same amount.
Although we're willing to do this, we're not willing to give him a free loan. To give him $50K we will have to liquidate equities, which means realizing an immediate loss and also taking that money out of the investment pool for future gains. So I'm trying to figure out the fairest way to structure this loan.
My first thought was something like this:
He repays us the sum of:
- The original principal ($25K each).
- The loss we actually realized when we liquidate the equities.
- Any gains we would have realized between the time we made the loan and he repays it, or 5% simple interest, whichever is greater.
But I can see several flaws in this. For example, if the equities improve substantially, we will lose future earnings on those equities because we will have to buy them back at a higher price and thus own fewer shares. And clearly there will be tax consequences of the distribution from an IRA, so not sure how to account for that.
Is there a better way to structure this that's fair to all but in particular protects us? Needless to say we'll be having an attorney draft the agreement, but I want to get an idea how to instruct the attorney to proceed.
Also, are there more risks I'm not seeing here?
EDIT: A discussion with our financial advisor resulted in exactly the same advice I've gotten here, although he was more succinct. He said, "Yes, it can be done, but you'd be crazy to do it. Let him go get his own loan." So we will not be proceeding with this idea.