Say you have a vehicle that you’re willing to lend to a relative for an extended period—perhaps a daughter going off to college or a brother whose new job involves a lengthy commute. You make sure that he/she is covered under your automobile insurance policy and hand over the keys.

But it’s not that simple. Loaning a car exposes you to a slew of legal liabil­ities and financial uncertainties. For example, who pays for repairs if the car breaks down? What if the family member lends the car to a friend who wrecks it? Are you covered? Who pays the deductible if the family member has an accident? And how much will your insurance premiums rise after an accident?

To protect yourself…

Have the family member sign and notarize a permission letter detailing your arrangement. In that letter, specify who is responsible for repairs and who pays the insurance deductibles…and include a promise that the borrower will pay traffic- and parking-related tickets promptly, since delays could result in the car being towed. Keep a copy of the agreement in the vehicle in case the police ever question the family member about ownership issues.

Request that the family member take out his/her own insurance policy on the car. Inform the insurance company or companies that the family member will be the primary driver and will have the primary policy—the first to cover ­liability in the event of an accident.

You should still maintain your own insurance on the car even if the family member gets insurance.

Also consider getting a general umbrella policy. Reason: In the event of an accident, other drivers can sue you for damages if the dollar amount exceeds your family member’s policy limits or if the family member fails to maintain coverage.

Give the car to the family member as a gift if you no longer need it. If you do this, you save money by canceling your own insurance coverage on the ­vehicle, and it’s the easiest way to protect yourself from liability and financial responsibilities. Unless the vehicle’s value is more than $14,000 (for 2014), you won’t have to file a gift-tax form with the IRS, and even then, it’s unlikely that you would owe any tax, since the overage will be applied to your lifetime estate-tax exemption.

Important: Carefully review state guidelines before transferring the title to your car, because these can vary significantly. For example, in most states, if a person gifts a vehicle to an immediate family member, he typically doesn’t have to pay an excise or a sales tax. But in Minnesota, for instance, “immediate family” is limited to a parent giving a car to a child, while in Maryland, owners of out-of-state vehicles that were not previously titled there by a family member have to pay an excise tax equal to 6% of the vehicle’s value when registering the car.

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