The name of the game in transferring assets out of an estate is knowing how and when to make the transfer. Properly planned and executed, this can minimize taxes and ensure a smooth hand-off.
Then again, sometimes you can help for your loved ones now and maybe even for your estate later by only making a temporary transition in the form of an intra-family loan in Overland Park and elsewhere.
The benefits of incorporating family loans into your estate plan were pointed out a short time ago in an article title “Estate planning benefits of intra-family loans” on LifeHealthPro.com.
The benefits of making a loan are not immediately obvious because that means, by definition, the loaned assets are to be returned to the estate of the one granting the loan, plus interest. Yes, if you make a loan to a family member you still have to expect it back and charge interest at the federally mandated interest rate, the Applicable Federal Rate (or AFR) for the relevant time-frame of the loan.
Otherwise, it is not a “loan,” but a “gift” and is subject to an entirely different set of rules.
You might think of it instead as a tool for “intra-family liquidity” for family members to help their loved ones rather than be at the mercy of the bank. After all, the object of the loan can be to do anything. Significant loans can allow for a significant investment, the appreciation of which need only be greater than the interest rate and this appreciate will pass to the loved one who accepted the loan. Likewise, it could go toward a home and even generate a mortgage tax deduction.
The central caveat is, again, that there are some serious differences between a loan and a gift, to include some heady tax ramifications if not done according to Hoyle. A loan that is not a loan is a gift. It is that simple.
Failure to treat the loan as a bona fide loan or to charge interest will raise red flags with the IRS.
Likewise, to forgive the debt is to effectively make a gift. This is not to be forgotten or treated lightly. Then, again, it does lend a certain power and flexibility if it is intentionally used to recharacterize a loan as a gift ... and when appropriate.
For many, this loan notion is at least a novel thought to consider. What could you and your loved ones be working toward together? You might be capable of more than you thought. Remember, it is not a strategy without some complications. However, an intra-family loan may be a powerful way to pursue family goals.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: LifeHealthPro (February 10, 2014) “Estate planning benefits of intra-family loans”