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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

How are you going to remember these tumultuous days of the 2020 coronavirus pandemic?  My three kids were each given a writing journal by my mother, who encouraged each of them to write about daily life in the midst of a pandemic, both for themselves and for future generations.  Earlier this week, I also helped my kids bury a time capsule—a shoe box full of items that my kids envision would be of interest to future generations who are trying to understand how a family of five is living through a 2020 pandemic.  Over these past few weeks, I have interacted with a few clients who have decided that, by reason of the most significant economic downtown in our lifetimes, now is the time to provide financial assistance to their adult children.  Some clients are helping a child with an intra-family loan, while others are gifting assets to the child.  In this month’s update, I provide a brief overview of the tax and legal implications of transferring assets to adult children, either by loan or gift, and stress the importance of documenting the client’s intentions in this regard.

  • Intra-Family Loan Transactions:

First, a parent (or parents) might provide a low-interest rate loan to an adult child.  For intra-family loans totaling less than $10,000, no interest rate needs to be charged at all, and no income is incurred by the parent.  If a loan is made for $10,000 or more, a minimum interest payment must be made by the adult child, and that interest payment is considered income to the parent.  The interest rate can be any rate agreed upon by the parent and child, provided that the interest rate is no less than the minimum intra-family loan rate set by the IRS.  If the loan is secured by a mortgage on the property used by the child as his or her primary residence, the interest payments to the parents can be taken as an income tax deduction.   The minimum interest rates required by the IRS for May loans are at record-low levels, as summarized below:

Short-Term                  Mid-Term                    Long-Term

Length of Loan:           0 to 3 years                  3 to 9 years                  Longer than 9 years


Interest Rate:               0.25%                          0.58%                          1.15%


Regardless of the terms of the loan, from a legal perspective it is critical that the terms of the loan be in writing.  The agreement may be as simple as a signed note from the child to the parent specifying the interest rate and the terms of the loan.  We commonly prepare promissory notes on behalf of an adult child that requires the child to make interest-only payments for the term of the loan, with the ability to prepay principal at any time.  Such a written loan agreement can be easily administered in the event that the parent dies before the loan is repaid.  In such an event, the loan becomes an “asset” of the estate of the parent.  Provided that the parent died with adequate other assets, the other children who did not receive the loan could receive other assets from the parent’s estate to offset the outstanding amount of the loan that is allocated to the child for whom the loan was originally made, and is now being forgiven.  Through this structure, the child is provided the benefit of the distribution when they most need the distribution, while the children who did not need the loan (or perhaps want a loan), are “made whole” following death.

  • Gifts:

Second, a parent might gift asset to the adult child. Two key questions follow from lifetime gifts:

  • Is the lifetime gift an “Advancement” against the child’s eventual inheritance? If parent(s) give assets to adult children unequally, parents should consider whether such lifetime gifts should be taken into account as an “advancement” against the specified percentage of remaining assets that will be received by such adult children following the death of the surviving parent. In the absence of any direction in the estate planning documents, any unequal lifetime gifts are not taken into account in making equal division of remaining assets at death.  It might therefore be necessary to revise estate planning documents to account for such unequal lifetime gifts and consider such significant lifetime gifts as an advancement against such child’s share.
  • Should a gift tax return be filed? If the value of the gift exceeds the client’s so-called “annual exclusion amount,” the client is required to file a gift tax return. For 2020, a single parent can gift up to $15,000 per beneficiary (child, grandchild, or even spouse of a child or grandchild) per year without having to file a federal gift tax return.  If married, these limitations double ($30,000 per beneficiary).  Even if the amounts exceed the relevant annual exclusion amounts, it simply means that the clients must file a federal gift tax return to document the gift with the IRS.  So long as cumulative lifetime gifts do not exceed the federal gift tax exemption amount of $11,580,000, no federal gift tax would be due.
  • Documenting Intentions

I have observed how difficult it is on surviving family members when a mother or father does not leave behind any history; that is, their intentions in transferring assets to children.  Just as my kids are attempting to document 2020 coronavirus history, I encouraged my clients to document, in writing, their own asset transfer decisions, not only for tax planning purposes, but also to avoid any ambiguity of perceived intentions among surviving family members.  When appropriate, parents should communicate their intentions among family during lifetime.  Even if such communication is not possible or appropriate, parents should at least document their intentions in writing, even if those written intentions are placed in the proverbial time capsule, or shoebox, to be uncovered at a later date.