10 Ways to Lawsuit Proof Your Estate #3

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine Part 3 – Keep track of loans and advances

If you loan money to one of several children, it’s best to have it in writing whether the loan is to be forgiven or repaid at your death. If you make a gift to one of several children, say $50,000 as a down-payment on a house, you can amend your will or trust to say that the gift is an “advancement”…Sometimes addressing this clarifies things, but sometimes the way it’s accounted for backfires and prompts litigation.

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

Family loans and advances are one of the stickiest areas in Estate Planning.

They can almost do more harm than good, especially if family members fail to follow the rules set forth in the Internal Revenue Code.

To begin with, loans between family members are presumed to be Gifts, not Loans, unless the family members can prove that the Loan was made by an “arms-length” transaction.

In short, there should be some documentation of the loan, and – more importantly from the perspective of the IRS – appropriate interest must be charged.

What constitutes appropriate interest?

Well the IRS – in it’s infinite wisdom – will apply the Applicable Federal Rate to the loan, if you fail to assign a different rate.

More importantly, if you choose to not charge interest – the IRS may attribute interest to the transaction anyhow (imputed interest) which can lead to negative tax consequences for failure to pay the imputed interest.

As part of your Living Trust – you should make reference to the loan, the duration of the loan, the rate of interest charged, and any other identifying information (i.e. documentation).

The note (or evidence of the loan) should be assigned to the Living Trust.

If you decide to allow a Child or Beneficiary’s share of the Estate to be reduced in lieu of repayment – you must factor in the applicable interest rate over the term of the loan (from the date the money was lent until repayment).

While inter-family loans are extremely common – the rules surrounding them are complex, and must be followed to avoid negative tax consequences or litigation.