Michigan Estate Planning Blog

Are Family Loans (Taxable) “Gifts” in Disguise?

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned. In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly. The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS. If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime. Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.

Reference: SmartMoney (June 13, 2012) “Making a Tax-Smart Family Loan”

Are Family Loans (Taxable) “Gifts” in Disguise?

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned. In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly. The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS. If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime. Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.

Reference: SmartMoney (June 13, 2012) “Making a Tax-Smart Family Loan”

Are Family Loans (Taxable) “Gifts” in Disguise?

Sometimes ensuring that a loved one has the assets they need – for a project or just for general use – will mean that you’ll be treading a fine line between making a “gift” and making a “loan.” The problem is that these are very different concepts, especially as far as the IRS is concerned. In brief, if you’re going to make a family loan, make it a real one or else consider an outright gift to be taxed by the IRS accordingly. The fine line between a loan and a gift is not a new one. This topic was explored in a recent article in SmartMoney titled “Making a Tax-Smart Family Loan.” Essentially, you need to remember that “loans” are what you make when when you aren’t interested in losing money and are probably trying to gain. To be a loan, the transferred amount must come with a standard interest rate. In fact, to be considered a “loan” the interest rate must be at least equal to the “applicable Federal Rate,” as determined monthly by the IRS. If you don’t charge the objective rate of interest, then you’ve essentially given that much away. Not surprisingly, that’s exactly how the IRS chooses to view the situation and, in return, it will hold you accountable for the interest not charged. As a result, this imputed interest can eat into your gift tax exemption amounts, whether annual or lifetime. Essentially, no loan to a family member should be considered a strictly off-the-books and casual affair. If you find yourself caught between making a gift or a loan, then you must choose one or the other and properly frame the transfer as such.

Reference: SmartMoney (June 13, 2012) “Making a Tax-Smart Family Loan”

Consider “Cleanup” Gifts Before 2013

The clock is winding down on the first half of 2012 - the “Year of Gifting.” With the nation’s capitol rather rancorously heading into election season, the time for “cleanup gifts” is closing. In fact, “cleanup gifts” were the subject of a recent article in The Wall Street Journal titled “A Golden Age of Gift Giving.” With the historically generous $5.12 million gift-tax exemption set to expire on December 31, 2012, this may be the time to cleanup gifts among your family so your family members are treated equally. For example, say you made a “loan” in the past to a family member that likely will never be repaid (and may even be challenged by the IRS anyway as being a “gift” rather than a “loan”). Why not consider “forgiving” that loan in 2012 and thereby convert it into a current “gift” within the current generous gift tax exemption? Forgiving family loans has to be done correctly, so it’s important to secure competent legal counsel before taking action.

Reference: The Wall Street Journal (May 25, 2012) “A Golden Age of Gift Giving”

Consider “Cleanup” Gifts Before 2013

The clock is winding down on the first half of 2012 - the “Year of Gifting.” With the nation’s capitol rather rancorously heading into election season, the time for “cleanup gifts” is closing. In fact, “cleanup gifts” were the subject of a recent article in The Wall Street Journal titled “A Golden Age of Gift Giving.” With the historically generous $5.12 million gift-tax exemption set to expire on December 31, 2012, this may be the time to cleanup gifts among your family so your family members are treated equally. For example, say you made a “loan” in the past to a family member that likely will never be repaid (and may even be challenged by the IRS anyway as being a “gift” rather than a “loan”). Why not consider “forgiving” that loan in 2012 and thereby convert it into a current “gift” within the current generous gift tax exemption? Forgiving family loans has to be done correctly, so it’s important to secure competent legal counsel before taking action.

Reference: The Wall Street Journal (May 25, 2012) “A Golden Age of Gift Giving”

Consider “Cleanup” Gifts Before 2013

The clock is winding down on the first half of 2012 - the “Year of Gifting.” With the nation’s capitol rather rancorously heading into election season, the time for “cleanup gifts” is closing. In fact, “cleanup gifts” were the subject of a recent article in The Wall Street Journal titled “A Golden Age of Gift Giving.” With the historically generous $5.12 million gift-tax exemption set to expire on December 31, 2012, this may be the time to cleanup gifts among your family so your family members are treated equally. For example, say you made a “loan” in the past to a family member that likely will never be repaid (and may even be challenged by the IRS anyway as being a “gift” rather than a “loan”). Why not consider “forgiving” that loan in 2012 and thereby convert it into a current “gift” within the current generous gift tax exemption? Forgiving family loans has to be done correctly, so it’s important to secure competent legal counsel before taking action.

Reference: The Wall Street Journal (May 25, 2012) “A Golden Age of Gift Giving”

Loans vs. Gifts – When It’s All in the Family

A loan is not a gift; if you’ve spoken with a bank representative or a particularly pennywise relative. We talk a lot about gifts when it comes to estate planning, but loans are just as important, as evident in a recent piece on the New Old Age Blog. In the article, a piece by Craig Reaves, past president of the National Academy of Elder Law Attorneys, a family had their mother’s estate plan in shambles. The culprit? A small notebook found under her bed. Apparently, there were many disagreements, but none so deep seated as those caused by the notebook. Why? Because it has a little ledger of the “loans” she had made to all the family members. Some of the family members hadn’t received any money, but at least one had received $20,000. Other family members had repaid in full and some had not so much as begun to do so. This case raises an important question: To what extent does the amount of an unpaid loan get added to the decedent’s estate, and does it simply come out of each family member’s share in proportion to their loans? One thing that’s clear, of course, is that the money is not gone and out of the estate. Why, it’s a loan and not a gift, after all. The second thing that’s clear is that the mother hadn’t thought about how these “loans” figured into her estate. That family aside, it should be noted that any loan evidenced by a signed promissory note can become an asset in the estate. And, even if it’s a family loan, the promissory note has to be repaid. An estate planner can ease this problem with a bit of foresight. For example, the loan can be forgiven, meaning they relinquish any expectation of being repaid. For that matter, too, the loan can be “offset” and thereby deducted from any assets made available through inheritance. While there are a number of things that can be done, forgetting the loan is not one of them. After all, the IRS is waiting just within earshot and has a trained eye to recognize the difference between a loan and a gift, as well as the additional tax burdens it can assign if it spots a gift or a poorly executed loan.

Reference: The New York Times – The New Old Age Blog (November 15, 2011) “Ask the Elder Law Attorney: Family Loans”

Loans vs. Gifts – When It’s All in the Family

A loan is not a gift; if you’ve spoken with a bank representative or a particularly pennywise relative. We talk a lot about gifts when it comes to estate planning, but loans are just as important, as evident in a recent piece on the New Old Age Blog. In the article, a piece by Craig Reaves, past president of the National Academy of Elder Law Attorneys, a family had their mother’s estate plan in shambles. The culprit? A small notebook found under her bed. Apparently, there were many disagreements, but none so deep seated as those caused by the notebook. Why? Because it has a little ledger of the “loans” she had made to all the family members. Some of the family members hadn’t received any money, but at least one had received $20,000. Other family members had repaid in full and some had not so much as begun to do so. This case raises an important question: To what extent does the amount of an unpaid loan get added to the decedent’s estate, and does it simply come out of each family member’s share in proportion to their loans? One thing that’s clear, of course, is that the money is not gone and out of the estate. Why, it’s a loan and not a gift, after all. The second thing that’s clear is that the mother hadn’t thought about how these “loans” figured into her estate. That family aside, it should be noted that any loan evidenced by a signed promissory note can become an asset in the estate. And, even if it’s a family loan, the promissory note has to be repaid. An estate planner can ease this problem with a bit of foresight. For example, the loan can be forgiven, meaning they relinquish any expectation of being repaid. For that matter, too, the loan can be “offset” and thereby deducted from any assets made available through inheritance. While there are a number of things that can be done, forgetting the loan is not one of them. After all, the IRS is waiting just within earshot and has a trained eye to recognize the difference between a loan and a gift, as well as the additional tax burdens it can assign if it spots a gift or a poorly executed loan.

Reference: The New York Times – The New Old Age Blog (November 15, 2011) “Ask the Elder Law Attorney: Family Loans”