Loans, Gifts & Family Strife

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.

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.

This story represents a classic example of failure to plan. It would have been very helpful if the mother had thought about what she considered fair and left appropriate instructions. 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 or ignoring a loan is not acceptable.

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.

We’ve said it before, proper planning starts with a thorough understanding of your needs, goals, dreams and aspirations. It takes into account your Values not just your Valuables. It starts with a thorough understanding of your family – those who you care about and who will someday receive the benefits of your success – and your family’s dynamics. Let’s work together to put together an estate plan that works for you. Remember, good planning is no accident.

Idaho Estate Planning

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