How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Lane Your Own Question

Lane
Lane, JD, CFP, MBA, CRPS
Category: Estate Law
Satisfied Customers: 3839
Experience:  Providing Estate Planning since 1986 - Specialties include corporations, trusts, philanthropic and individual planning
1929974
Type Your Estate Law Question Here...
Lane is online now
A new question is answered every 9 seconds

relating to the federal estate tax laws. if a loan is given

Resolved Question:

relating to the federal estate tax laws. if a loan is given from the estate of a person while he is alive to a family member what would be the proper paperwork , bookeeping and accounting so when the estate is taxed upon death the loan is not included as a taxable "gift" ?
Submitted: 9 months ago.
Category: Estate Law
Expert:  Lane replied 9 months ago.

Lane :

Hi

Lane :

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.

Lane :

Sorry, just looked back and saw you used the word estate ... everything above applies, conceptually, just substitute the word loan Maker

Lane :

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)

Lane :

And in terms of death ... when the loan maker dies, there will be money owed to the estate, if the estate is still outstanding

Lane :

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

Lane :

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)

Lane :

sorry for the typos.... essentially the loan will be an asset of the estate

Lane :

Questions?

Lane :

Here are the best practices (mentioned above) in terms of not having the loan perceived as a gift and added back at all...

Lane :

Structuring Loan So It Is Recognized. The IRS presumes a transfer of
money to a family member is a gift, unless the transferor can prove he
received full and adequate consideration. Avoid the IRS gift presumption
by affirmatively demonstrating that at the time of the transfer a bona fide
creditor-debtor relationship existed by facts evidencing that the lender can
demonstrate a real expectation of repayment and intention to enforce the
debt. Treatment as a bona fide debt or gift depends on the facts and
circumstances.
Summary: Structuring and Administration of Loan to Avoid Gift
Presumption.
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

Lane :

One of the factors in determining whether the loan is a bona fide loan rather than
an equity transfer is whether the borrower had the ability to repay. The ability to
repay 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 the
ability to repay the loan may not be respected as a loan.

Lane :

If you DO decide to accrue the interest .... see this:

Lane :

Nevertheless, if interest
accrues but is not actually payable, the original issue discount (OID) rules will
apply, and they generally require that a pro rata amount of the overall amount of
the 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 is
generally determined under a “constant yield method” as described in the §1272
regulations. Treas. Reg. §1.1272-1(b)(1).

Customer:

great information exactly what i needed thank you

Lane, JD, CFP, MBA, CRPS
Category: Estate Law
Satisfied Customers: 3839
Experience: Providing Estate Planning since 1986 - Specialties include corporations, trusts, philanthropic and individual planning
Lane and 5 other Estate Law Specialists are ready to help you
Expert:  Lane replied 9 months ago.


Thanks for the rating Steve,

Glad we could help

Lane
Expert:  Lane replied 9 months ago.
Hi steve,


I'm just following up with you to see how everything is going. Did my answer help?


Lane

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • My husband has been driving me insane with questions regarding estate issues since his mother died. I'm not a lawyer! Thanks to JustAnswer, I was able to calm his concerns. Loretta T Illinois
< Last | Next >
  • My husband has been driving me insane with questions regarding estate issues since his mother died. I'm not a lawyer! Thanks to JustAnswer, I was able to calm his concerns. Loretta T Illinois
  • Thanks Adam!! - A very direct and understandable response - you have been a great help! Happy Customer Ellicott City, MD
  • Mr. Kaplun clearly had an exceptional understanding of the issue and was able to explain it concisely. I would recommend JustAnswer to anyone. Great service that lives up to its promises! Gary B. Edmond, OK
  • My Expert was fast and seemed to have the answer to my taser question at the tips of her fingers. Communication was excellent. I left feeling confident in her answer. Eric Redwood City, CA
  • I am very pleased with JustAnswer as a place to go for divorce or criminal law knowledge and insight. Michael Wichita, KS
  • PaulMJD helped me with questions I had regarding an urgent legal matter. His answers were excellent. Three H. Houston, TX
  • Anne was extremely helpful. Her information put me in the right direction for action that kept me legal, possible saving me a ton of money in the future. Thank you again, Anne!! Elaine Atlanta, GA
 
 
 

Meet The Experts:

 
 
 
  • Thomas McJD

    Attorney

    Satisfied Customers:

    3076
    Wills, Trusts, Probate & other Estate Matters
< Last | Next >
  • http://ww2.justanswer.com/uploads/MC/mclemorelawyer/2011-9-21_193631_IMGP8718Version2.64x64.jpg Thomas McJD's Avatar

    Thomas McJD

    Attorney

    Satisfied Customers:

    3076
    Wills, Trusts, Probate & other Estate Matters
  • http://ww2.justanswer.com/uploads/NY/nyclawyer/2012-6-7_22011_photo66139201112041.64x64.jpg Infolawyer's Avatar

    Infolawyer

    Attorney

    Satisfied Customers:

    3781
    Licensed attorney helping individuals and businesses.
  • http://ww2.justanswer.com/uploads/BA/barristerinky/2012-6-10_22423_office.64x64.jpg Barrister's Avatar

    Barrister

    Attorney

    Satisfied Customers:

    2188
    13 yrs estate law, real estate. Wills/Trusts/Probate
  • http://ww2.justanswer.com/uploads/RA/rayanswers/2012-6-7_23346_Untitled1.64x64.jpg RayAnswers's Avatar

    RayAnswers

    Attorney

    Satisfied Customers:

    1484
    Texas lawyer for 29 years in Estate law
  • http://ww2.justanswer.com/uploads/RO/RobertJDFL/2012-6-6_175352_7538220120606.64x64.jpg RobertJDFL's Avatar

    RobertJDFL

    Attorney

    Satisfied Customers:

    1226
    Experienced in multiple areas of the law.
  • http://ww2.justanswer.com/uploads/PH/philip.simmons/2012-6-7_161915_BIGPhilipSimmons.64x64.jpg P. Simmons's Avatar

    P. Simmons

    Attorney

    Satisfied Customers:

    770
    12+ yrs. of experience including estate law.
  • http://ww2.justanswer.com/uploads/RA/ratioscripta/2012-6-13_2955_foto3.64x64.jpg Ely's Avatar

    Ely

    Counselor at Law

    Satisfied Customers:

    754
    Fully licensed attorney in Texas in private practice.