What’s the Best Way to Go with Loans to Family?

Loans to family must be treated like real, enforceable loans to third parties if you don’t want to run afoul of gift and estate tax.

Loans are a terrific way for parents to foster a child’s independence, encourage responsibility and signal their confidence that their child can succeed on their own.  They also don’t use any of your lifetime gift tax exemption ($11.58 million per person).  But, loans to family highlight some important tax and family concerns you should be aware of.

Kiplinger’s recent article entitled “Gifts vs. Loans: Don’t Be Generous to a Fault” tells the story of Mary Bolles. The case illustrates that parents’ actions and expectations as to repayment of the loan can recharacterize the “loan” to a taxable “gift.” That can mean unintended gift tax consequences. Mary was the mother of five who made numerous loans to each of her children. She kept copious records of each loan and any repayments. Between 1985 and 2007, she loaned her son Peter about $1.06 million to support his business ventures — despite the fact that it soon was clear he wouldn’t be able to make any more payments on the loans. None of the loans to Peter was ever formally documented, and Mary never tried to enforce the collection of any of the loans.

In late 1989, Mary created a revocable living trust, which specifically excluded Peter from any distribution of her estate when she died. While she later amended her trust to no longer exclude him, she included a formula to account for the “loans” he received in making distributions to her children. After her death, the IRS said that the entire amount of the loans, plus accrued interest, was part of her estate. They assessed the estate with a tax deficiency of $1.15 million.  The estate said the entire amount was a gift.

At trial, the court considered the factors to be weighed in deciding whether the advances were loans or gifts. Noting that the determination depends not only on how the loan was structured and documented, the court also explained that in the case of a loan to family, a major factor is whether there was an actual expectation of repayment and intent to enforce the debt.

The court compromised and held that any advances prior to 1990 were loans (about $425,000), since the evidence suggested that Mary reasonably expected that Peter would repay the loans, until he was disinherited from her trust in late 1989. The court said that the money given to Peter after he was disinherited — from 1990 onward — were gifts.

The decision shows that if you’re considering taking advantage of the elevated gift tax exemption before it sunsets, review any outstanding family loan transactions. You should see the extent to which those loans may have been transmuted into gifts over the years—which may adversely impact the amount of your remaining available exemption. The safest way to do this would be to consult an experienced estate planning attorney, who can help you safely navigate these complex rules.

When making a gift there are other considerations.  If you will make such a loan, treat it as such.  Have a lawyer prepare a loan agreement.  Create a reasonable expectation that the loan will be repaid and that you’ll enforce it.  This isn’t just for tax reasons, it is to maintain family harmony.  Giving a “loan” to one child may not sit well with the others, so make sure it is honored.  You should also consider the impact this will have on state taxes, income taxes, and long-term care planning if relevant to you.

To be safe, follow these simple steps:

  1. Document the loan transaction between the lender and borrower.
  2. Charge interest based on the government rates (AFR), which are published monthly.
  3. Make sure the borrower will have enough net worth to likely repay the loan.
  4. Get a copy of the borrower’s financial statement.
  5. If the loan sets out periodic payments, make certain these are made on time.
  6. Report the interest income you receive from the borrower on your income tax return.

Make sure that you do any intra-family loans properly to avoid any future issues.

Reference: Kiplinger (Oct. 7, 2020) “Gifts vs. Loans: Don’t Be Generous to a Fault”

This Post Has 57 Comments

  1. Twyla

    I just like the helpful information you supply to your articles.
    I’ll bookmark your blog and test again here frequently.

    I am quite certain I will learn plenty of new stuff right
    here! Best of luck for the next!

  2. KetoBHB +

    Yay google is my world beater assisted me to find this outstanding site!

    Also visit my blog post – KetoBHB +

  3. Slim X Keto

    Do you mind if I quote a few of your articles as long as
    I provide credit and sources back to your site?
    My blog site is in the exact same area of interest as yours and
    my visitors would certainly benefit from some of the
    information you provide here. Please let me know
    if this okay with you. Regards!

    My web blog … Slim X Keto

  4. DFine8

    Excellent, what a weblog it is! This web site gives useful data to us, keep it up.

    Also visit my page – DFine8

  5. Brianna

    I do not even understand how I stopped up right here, however I assumed this submit used to
    be good. I do not recognise who you might be but definitely
    you’re going to a well-known blogger for those who aren’t already 😉 Cheers!

    Stop by my blog :: Brianna

  6. Thanks on your marvelous posting! I really enjoyed reading it, you happen to
    be a great author. I will be sure to bookmark your blog and
    will come back from now on. I want to encourage
    continue your great job, have a nice morning!

    Have a look at my website :: Max Thrive Keto Review

  7. Jesse

    I don’t drop many responses, but i did a few searching and wound up here What’s the Best Way to
    Go with Loans to Family? | Galligan & Manning.
    And I do have some questions for you if you do not mind.

    Could it be simply me or does it look as if like some of the responses
    appear as if they are coming from brain dead people? 😛 And, if you
    are writing at additional online social sites, I would like to keep up with anything new you have to post.

    Could you list of every one of all your shared pages like your Facebook page,
    twitter feed, or linkedin profile?

    Check out my blog: Jesse

  8. Allura Fresh Cream

    No matter if some one searches for his required thing, so he/she needs to be available that in detail, therefore
    that thing is maintained over here.

    my site … Allura Fresh Cream

  9. Tremendous issues here. I’m very satisfied to see your
    post. Thanks so much and I am taking a look ahead to
    touch you. Will you please drop me a e-mail?

    Look at my blog: Green Earth CBD Gummies

  10. Admiring the hard work you put into your website and detailed information you present.
    It’s nice to come across a blog every once in a while
    that isn’t the same out of date rehashed material. Excellent read!
    I’ve bookmarked your site and I’m adding your RSS feeds to my Google account.

    Also visit my blog post Slimy Vita Vital Effect

  11. www.xwsjvip.cn

    Hello mates, its fantastic post concerning tutoringand fully defined, keep it up all the

    Here is my page: Leaf Max CBD (http://www.xwsjvip.cn)

  12. D-Fine8 Reviews

    It’s not my first time to pay a quick visit this website, i am browsing this website dailly and obtain pleasant data
    from here all the time.

    Also visit my web-site … D-Fine8 Reviews

  13. Leafy Living CBD

    hello there and thank you for your information ? I have definitely picked
    up anything new from right here. I did however expertise some technical issues using this site, since I experienced
    to reload the web site many times previous to I could get it to load correctly.
    I had been wondering if your web host is OK?
    Not that I’m complaining, but slow loading instances times
    will very frequently affect your placement in google and could damage your high quality
    score if ads and marketing with Adwords. Anyway
    I?m adding this RSS to my e-mail and could look out for a lot more of your respective exciting content.
    Ensure that you update this again soon..

    my web-site Leafy Living CBD

  14. http://www.aniene.net

    Your method of telling all in this paragraph is in fact fastidious, all be able to without difficulty understand
    it, Thanks a lot.

    Feel free to visit my web site: http://www.aniene.net

  15. deletedbyfacebook.com

    We would like to thank you yet again for the beautiful
    ideas you gave Jeremy when preparing her own post-graduate research and also, most
    importantly, with regard to providing the many ideas in a blog post.
    Provided that we had been aware of your website a year
    ago, we’d have been rescued from the useless measures we were taking.
    Thank you very much.

    my homepage … deletedbyfacebook.com

  16. ACV Rx

    Fastidious replies in return of this matter with firm arguments and explaining the whole thing about

    my homepage … ACV Rx

  17. ACV Rx Ingredients

    We wish to thank you again for the lovely ideas you offered Jesse when preparing her post-graduate research as well as, most importantly, with regard to providing all
    the ideas in one blog post. Provided we had been aware of your site a year ago, we may have been rescued
    from the needless measures we were participating in. Thank you
    very much.

    Also visit my website :: ACV Rx Ingredients

  18. Solvolt Charger

    obviously like your web site but you have to take a look at the spelling
    on quite a few of your posts. Many of them are rife with spelling issues and I to
    find it very troublesome to inform the reality on the other hand I will surely
    come back again.

    Also visit my website :: Solvolt Charger

  19. Solvolt Review

    Pretty section of content. I just stumbled upon your web
    site and in accession capital to assert that I get actually enjoyed account
    your blog posts. Anyway I’ll be subscribing to your feeds
    and even I achievement you access consistently fast.

    Feel free to visit my site :: Solvolt Review

  20. A motivating discussion is definitely worth comment. I do believe that you need to write
    more about this subject, it might not be a taboo subject but typically folks don’t discuss these
    issues. To the next! All the best!!

  21. Magnificent goods from you, man. I have understand your stuff previous to and you’re just extremely fantastic.
    I actually like what you’ve acquired here, certainly like
    what you’re saying and the way in which you say it.
    You make it entertaining and you still care for to keep
    it sensible. I cant wait to read much more from you.

    This is really a tremendous web site.

    Look at my website: Coastal Hemp CBD Gummies

  22. Ultra Cut Keto

    Hi there this is kind of of off topic but I was wanting to know if blogs use WYSIWYG editors or if you have to manually code with HTML.
    I’m starting a blog soon but have no coding knowledge so I wanted to get advice from
    someone with experience. Any help would be enormously

    Also visit my blog – Ultra Cut Keto

  23. D-Fine8 Ingredients

    Hello my family member! I want to say that this article is amazing,
    great written and come with approximately all important infos.
    I would like to look extra posts like this.

    Take a look at my web-site … D-Fine8 Ingredients

  24. DFine8

    Having read this I thought it was really enlightening.
    I appreciate you taking the time and effort to put this informative article together.
    I once again find myself spending way too much time both reading and commenting.
    But so what, it was still worthwhile!

    Visit my blog post: DFine8

  25. Erorectin Reviews

    I was more than happy to uncover this page. I want to to thank you for
    your time for this particularly fantastic read!!

    I definitely loved every part of it and I have you book marked to check out new things on your

    Feel free to visit my blog post; Erorectin Reviews

  26. spinfinity casino

    I was recommended this web site by my cousin. I am not sure whether this post is written by him as nobody else know such detailed about my problem.
    You are amazing! Thanks!

  27. Re ViVium

    Your mode of telling everything in this piece of writing is really nice, all be able to
    simply know it, Thanks a lot.

    Feel free to visit my blog: Re ViVium

  28. SynerSooth CBD

    I?m not that much of a online reader to be honest but your blogs
    really nice, keep it up! I’ll go ahead and bookmark your site to come
    back later on. All the best

    Feel free to surf to my web-site: SynerSooth CBD

  29. ACV Rx Side Effects

    Hello to every body, it’s my first visit of this web site;
    this blog contains remarkable and in fact good information in support of readers.

    my web-site :: ACV Rx Side Effects

  30. high country casino

    I love your blog.. very nice colors & theme. Did you make this website yourself
    or did you hire someone to do it for you? Plz respond as I’m looking to create my own blog and would like to find
    out where u got this from. thanks a lot

  31. Gold Strike Casino

    Hi there, all the time i used to check blog posts here early in the dawn, as i like to learn more and more.

  32. SoloVolt Reviews

    Hello there, I discovered your blog by the use of Google even as looking for a similar topic,
    your website came up, it appears good. I’ve bookmarked it in my google bookmarks.

    Check out my blog SoloVolt Reviews

  33. Keto Redux

    I got what you intend,saved to favorites, very nice internet site.

    Also visit my web-site; Keto Redux

  34. Wow that was unusual. I just wrote an very long comment but after I clicked submit my comment didn’t appear.
    Grrrr… well I’m not writing all that over again. Anyways,
    just wanted to say superb blog!

    Here is my blog post Cryogen Air Conditioner

  35. Thank you so much regarding giving my family an update on this issue on your blog.

    Please understand that if a brand-new post appears or in case any changes occur about the current write-up, I would be
    thinking about reading a lot more and knowing how
    to make good usage of those strategies you share. Thanks
    for your time and consideration of people by making your blog available.

    Here is my site :: Rapid Keto Cut Pills

  36. 3DS Pills

    Great post. I will be facing a few of these issues as well..

    Also visit my page – 3DS Pills

  37. continent.anapa.org

    Hey very cool blog!! Man .. Beautiful ..
    Wonderful .. I will bookmark your web site and take the feeds also…I’m satisfied to seek out so
    many useful information here within the put up,
    we need develop extra strategies in this regard, thanks for sharing.

    My homepage … continent.anapa.org

  38. Hiya, I’m really glad I have found this info. Today bloggers publish only about gossips and internet and this
    is really annoying. A good blog with exciting content,
    this is what I need. Thank you for keeping this website, I’ll be visiting it.

    Do you do newsletters? Can not find it.

    My web site … SynerSooth CBD Review

Leave a Reply