Estate Law Questions? Ask an Estate Lawyer.
First, you would need a promissory agreement or any other loan document (an agreement for the loan itself) that complies with the requirements for loan documents in your state ... Second, be very sure that the interest is paid back to the trust at a rate that is commensurate with the market (otherwise you'll have what IRS calls a below-market loan which, in this scenario, would constitute a gift and/or result in the IRS charging imputed interest to the trust ... Third, be sure that the rrust reports this interest on it's 1041 as it would any other income, such as any other interest income, rental income, etc.
Sorry, just looked back and saw you used the word estate ... everything above applies, conceptually, just substitute the word loan Maker
YOu can set up the terms of the loan any way you want (monthly payments of principal and Interest, interest only, etc) ... the main thing, again, is that realistic market rates are charged and that payments are made (or again, back to the terms of the loan you COULD have the loan capitalize interest not paid - added to the principal of the loan)
And in terms of death ... when the loan maker dies, there will be money owed to the estate, if the estate is still outstanding
The exeuctor can then demand that payment continue, and pass that asset along to others, forgive the debt and issue a 1099 to the borrower and write off the bad debt on the 1041 OR the person's last tax return OR simply forgive it and then that would not be a gift but rather an inheritance
If the estats is nt above the exemption equivalent of $5,250,000, then there would be no issue, in terms of transfer tas (estate tax, of a decedent, or gift tax if it's a transfer whilc alive)
sorry for the typos.... essentially the loan will be an asset of the estate
Here are the best practices (mentioned above) in terms of not having the loan perceived as a gift and added back at all...
Structuring Loan So It Is Recognized. The IRS presumes a transfer ofmoney to a family member is a gift, unless the transferor can prove hereceived full and adequate consideration. Avoid the IRS gift presumptionby affirmatively demonstrating that at the time of the transfer a bona fidecreditor-debtor relationship existed by facts evidencing that the lender candemonstrate a real expectation of repayment and intention to enforce thedebt. Treatment as a bona fide debt or gift depends on the facts andcircumstances.Summary: Structuring and Administration of Loan to Avoid GiftPresumption.6.• Sign a promissory note• Establish a fixed repayment schedule• Set a rate at or above the AFR in effect when the loan originates• Secure or collateralize the debt• Demand repayment• Maintain records that reflect a true loan transaction• Repayments are made• Borrower solvency• Do not have a prearranged schedule to forgive the loan
One of the factors in determining whether the loan is a bona fide loan rather thanan equity transfer is whether the borrower had the ability to repay. The ability torepay was only one of nine factors examined in Miller v. Commissioner (T.C.Memo. 1996-3), but there is significant danger that a loan to someone without theability to repay the loan may not be respected as a loan.
If you DO decide to accrue the interest .... see this:
Nevertheless, if interestaccrues but is not actually payable, the original issue discount (OID) rules willapply, and they generally require that a pro rata amount of the overall amount ofthe OID over the life of the loan must be recognized each year as ordinary income,even for cash basis taxpayers. The amount of OID included in income each year isgenerally determined under a “constant yield method” as described in the §1272regulations. Treas. Reg. §1.1272-1(b)(1).
great information exactly what i needed thank you
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