6 Tax & Estate Considerations for Gifting or Loaning to Family Members


Last month I wrote about the basic rules of giving and lending money to family members. Click here to read our blog article, “6 Rules of Lending Money to Family Members”

In this article, I outline some additional considerations: the important tax and estate planning implications of giving a gift or lending money to family members. It’s important to consider these, and to discuss them with your tax and estate advisors to ensure you are making the best decisions.

Here are 6 tax and estate issues to consider when (financially) supporting family members.

  1. Document the support. This is kind of a repeat from last month, but it is that important. If you give more than $14,000, you may need to file a gift tax return. If you lend more than $10,000 to a family member, you need to document the transaction and the terms of the loan. Interest paid to you may be taxable income to you, and deductible by your child. Even if you plan to forgive the interest (a gift), you still need to document it.
  2. Update your Estate Plan. If you lend your child enough to, say, buy a house, you should evaluate how that will impact other gifts or support in your estate planning. Maybe forgiving that loan is the child’s inheritance. Maybe you want your son to have to pay it back to his siblings. Unless you document the loan (or gift) and spell out your intentions in your will and other documents, it’s unlikely that things will unfold the way you had hoped.
  3. The IRS has rules for large family loans. It’s important to understand the rules for loans over $10,000. For one thing, the IRS assumes you charge interest, and a market rate interest at that. Whether or not you do collect interest, the IRS assumes that you do and can adjust your tax return to show the interest you should have received as taxable income. Not charging the market rate of interest can also show up as a gift for gift tax purposes.
  4. You can deduct a bad debt. One advantage to documenting your family loan is that if the borrower defaults on the loan, you may be able to deduct the bad debt on your tax return. But only if you have the documentation to prove that it was a loan instead of a gift.
  5. Gifting assets can have a tax advantages. Properly structured, gifts to support family members can reduce the overall tax burden when an asset is sold. For example, a child could gift appreciated stock to help support a parent with high medical expenses which could offset the realized gains from selling the asset. Or an independent child who is just starting a new job could sell gifted stock at a lower capital gains rate than a parent. These are two simple examples, but you get the idea.
  6. Paying an institution directly isn’t considered a gift. Current tax regulations allow gifts of up to $14,000 without having to file a gift tax return. However, grandparents (or rich aunts and uncles) who want to support a child in college can pay the institution directly and the IRS won’t count that amount against the annual gift limit.

Protecting Yourself When Gifting to Family Members

Gifting or lending to your children is one way to help them get started in today’s competitive and complex economy. My parents’ support has been critical to my success, and I fully expect to help give my own children a leg up if they ever need it. It’s important to me that they learn to stand up on their own, but like most parents, I want them to know they can count on my support when they need it. While helping them is important, it’s just as important to protect yourself in the process by understanding the rules and properly structuring any assistance. As with any financial decision, it can have an impact on your own financial well-being and should be considered in conjunction with your overall financial planning. Contact us to learn more about how we can help you integrate your family and charitable goals into your plans for financial success.

About Rick Brooks

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

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