Annapolis, Maryland Wills, Trusts & Estate Planning

A Family Loan Vs. A Family Gift - Annapolis Estate Planning

Be prepared to demonstrate that the loan is legitimate, and that repayments are being made regularly. This documentation can also help sort matters out if the lender should die before the full value of the loan has been repaid.

If you are compelled to help out a family member by way of an intra-family loan, make sure you are aware of all the ins and outs before you extend the offer. The benefits of incorporating family loans into your estate plan were pointed out a short time ago in an article titled “Estate planning benefits of intra-family loans” on LifeHealthPro.com.

The benefits of making a loan are not immediately obvious because that means, by definition, the loaned assets are to be returned to the estate of the one granting the loan, plus interest. Yes, if you make a loan to a family member you still have to expect it back and charge interest at the federally mandated interest rate, the Applicable Federal Rate (or AFR) for the relevant time-frame of the loan. Otherwise, it is not a “loan,” but a “gift” and is subject to an entirely different set of rules.

You might think of it instead as a tool for “intra-family liquidity” for family members to help their loved ones rather than be at the mercy of the bank. After all, the object of the loan can be to do anything. Significant loans can allow for a significant investment, the appreciation of which need only be greater than the interest rate, and this appreciation will pass to the loved one who accepted the loan. Likewise, it could go toward a home and even generate a mortgage tax deduction.

The central caveat is, again, that there are some serious differences between a loan and a gift, to include some heady tax ramifications if not done according to Hoyle. A loan that is not a loan is a gift. Failure to treat the loan as such or to charge interest will raise red flags with the IRS.

Likewise, to forgive the debt is to effectively make a gift. This is not to be forgotten or treated lightly, but then it does lend a certain power and flexibility if it is intentionally used to re-characterize a loan as and when appropriate.

For many, this loan idea is at least a novel thought to consider. What could you and your loved ones be working toward together? You might be capable of more than you thought. Remember, it is not a strategy without some complications. However, an intra-family loan may be a powerful way to pursue family goals.

Reference: LifeHealthPro (February 10, 2014) “Estate planning benefits of intra-family loans”

Holden & Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

When An Inheritance Hinders Financial Aid - Annapolis Estate Planning

"Kids inherit money. We don't want it."

Sometimes too much inheritance all at once is a threat to moral development, it’s true, but sometimes a gift can threaten a college education by complicating financial aid.

As parents of the college-bound understand to a dizzying degree, financial aid is a difficult calculus of have and have not. It is often an entirely necessary salvation. Unfortunately, the types of income a parent or a student of a parent receive will have dramatic influences both on the availability of financial aid and the ease with which it is attained.

In other words, sometimes an inheritance can be a threat to financial aid and the college degree of a young person, especially if there are family issues at play.

Enter the story of “Robin” as relayed in a recent Forbes article titled “An Inheritance That Could Foul Financial Aid.” Truth be told, the story of Robin and the potential difficulties of her children with financial aid is as much a story of family disagreement as it is of grumpy institutional curmudgeonry. Nevertheless, it is worth considering Robin’s story of family disagreement and the details a FAFSA will sniff out, even if they are not available and true.

What is even more important is to understand that different assets, inheritances and gifts will have a serious effect on financial aid, taxation and/or financial viability for higher education. If your goal is to financially assist your loved ones through college, then there are some very specific types of gifts to consider without jeopardizing financial aid in the process.

Reference: Forbes (November 18, 2013) “An Inheritance That Could Foul Financial Aid”

            Holden & Campbell, LLC - Annapolis, Maryland Estate Planning Attorneys

Are You A Money Manager For Others? - Annapolis Estate Planning

If you’re handling the finances for an older family member or are about to do so, some sticky challenges can pop up quicker than you think.

Managing your personal finances can be a challenge. But what if you had to manage money for someone else? Managing the finances of a loved one is a far more tenuous role to occupy, as the outcome involves another's well-being instead of your own.

If you are caring for an elderly loved one and stepping up to oversee their finances as well, then there are some important rules to know and follow.

Recently, the Consumer Financial Protection Bureau released four helpful guides on the topic of “Managing Someone Else’s Money.” In addition, for some short tips on the subject you can review the “4 rules for managing parents’ money,” a MarketWatch article released on Veterans Day.

The four tips – paraphrased – include:

1. Understand the power, meaning you have to understand what you can and cannot do under a power of attorney document.
2. Keep accounts separate, even if it can be a pain to moderate so many accounts, avoid the temptation to commingle funds that are not yours.
3. Document everything, even if it means doubling down on the bookkeeper.
4. Be watchful for exploitation by others, because being in charge of the finances does not mean you are the only one who exerts some financial control or influence. Those seeking to take financial advantage of the elderly include strangers and loved ones themselves.

In reality, there is much more to know and follow when managing other people’s money. Nevertheless, you certainly will be held to the basics. Remember to keep the CFPB guides and the MarketWatch article available for handy reference.

In truth there are many little rules for managing finances, but these are the basics that you need to accomplish to do the job. If there is time, you and your elderly loved one ought to plan now so you are prepared to fulfill your management role and the challenges ahead.

Reference: MarketWatch (November 11, 2013) “4 rules for managing parents’ money”

                    Holden & Campbell, LLC - Annapolis, Maryland Estate Planning

Annapolis Estate Planning: Consider “Cleanup” Gifts Before 2013

With the government's $5.12 million gift-tax exemption set to fall to $1 million at year-end, more families are using the current leeway to do some financial housekeeping, experts say.

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”

Holden Campbell, LLC - Annapolis Estate Planning Attorneys

Annapolis Estate Planning Blog: 5 Common Gift Tax Myths

 

Did you get any exciting gifts this holiday season? What’s not so exciting are the tax implications that may come with them. We often get questions about those implications this time of year so let’s take a look at some of the most common tax myths about gifts.Christmas is over and you might have even gotten all the tinsel out of the house by now, but that doesn’t mean you’re done giving gifts. It’s likely you’re just now turning to the largest "gifts," as your think about taxes and your estate plan. To that end, an article about the "5 Common Tax Myths About Gift Giving" came out recently in Forbes.

 

 

 

Myth: You have to pay taxes on gifts that you receive.

False. You pay gift taxes on the gifts you give, not on what you receive. The reason for the gift tax is to keep people from avoiding the estate tax by simply "giving" it away while they are alive. Accordingly, the person that does the giving accepts the tax liability. (That said, the receiver may then owe other taxes since they now own the assets, but that’s all in the course of ownership).

Myth: You pay a tax on gifts you make that are over $10k.

This is not entirely true since there are a number of other factors. For starters, the amount is now closer to $13k worth of gifts in a year. However, gifts to spouses (so long as they are citizens) and approved charities don’t count against that limit. If you do exceed that amount, it will first count against your lifetime exemption of $5 million. Remember to file a gift tax return with your 2011 income tax filing.

Myth: You can give freely by offering them as loans and then forgiving the loans.

False, the IRS is out in front of you on that, too. Loans are loans anad gifts are gifts. Should the IRS feel you’re treating a loan as a gift, it will consider it as such.

Myth: Charitable deductions can always be deducted against your taxable income.

Not quite. First, charitable deductions can only be claimed if the IRS recognizes the charity as a charity. Second, you can only deduct the effective amount given. So, if you receive anything of value in return, then such value counts against the value of your charitable contribution (e.g., a $100 gift is only a $60 charitable deduction, if you receive a $40 steak dinner in return).

Finally, one other myth is that you need not worry about how your home state treats gifts, independent of the IRS. No, each state has its own quirks regarding deductions and ownership.  Currently, there is no Maryland Gift Tax. 

For that matter, too, it’s worth noting that these amounts and rules are subject to evolving tax law which is in the cross hairs of 2012 politics and may, therefore, change within a year.Reference: Forbes (December 27, 2011) "5 Common Tax Myths About Gift Giving"

                                    Holden-Campbell, LLC:  Annapolis Estate Planning Attorneys 

 

Annapolis Estate Planning: Loans vs. Gifts – When It’s All in the Family

Whenever making loans — to anyone — there should be a written promissory note that spells out the amount borrowed, whether interest is being charged and how repayments are to be made. It’s fine if it’s merely a demand loan and there’s no repayment schedule. But parents should also specify, in their wills or trusts, how the loan should be handled after they die. Require it to be repaid? Forgive the loan? Offset it with interest? Without interest?

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. A loan must have a minimum rate of interest as determined by a flucating interest rate published each month by the IRS. Failure to charge that minimum interest rate could result in unanticipated taxable income called "deemed income." I advise all my clients to distinguish between a gift and a loan. When making a loan, the loan should be in wiriting and include typical terms such as the term of the loan and the interest rate.

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”

Holden-Campbell, LLC, Annapolis Estate Planning Attorneys