Accounting For Gifts And Loans To Children In Your Estate Plan

As a parent, you want to give your children everything they need to succeed and live a happy life. Often, even adult children need a bit of help with life’s challenges, and you may provide that helping hand again by offering a loan or a gift.

Perhaps the distinction between the two is not important for you, but correctly accounting for gifts and loans to children in your estate plan is vital.

At William C. Roof Law Group, our Orlando estate planning attorneys offer guidance on how to prevent issues not only among other children or family members but also with the IRS. Learn more about what your options are.

Estate planning refers to a number of tasks that leave your estate in order so that when you die, your legacy is protected and your assets are distributed as you’d like. Estate planning also considers how your estate will be managed if you’re incapacitated. Your estate can be made up of many assets, including:

It’s not just the mega-wealthy who benefit from estate planning. People in all income brackets should consider setting up some of the most common estate planning documents, like wills and trusts. They can help you preserve family wealth, provide for dependents, and even help charitable organizations.

When accounting for gifts and loans to children in your estate plan, you need to first understand the difference between them when it comes to your estate. When you give a gift, you don’t expect to have your estate or trust paid back, but you also don’t expect the beneficiary’s inheritance to be reduced as a result of the gift.

There are tax gift limits you need to be aware of. You can only gift $18,000 per recipient per year ($36,000 per married couple ) to avoid going over your annual gift tax exclusion, but your estate tax lifetime exemption will likely not be affected. Since your lifetime gift limit is $13.61 million, most people don’t have to stress about going above that.

Intra-family loans are different. They require that you set up an agreement in writing. You need to cover everything, from the kind of interest rate you’ll charge (if any) to how long the borrower has to pay back the loan.

Something crucial that you might not even have considered is whether the loan is forgiven if you or they die. If it’s not, your estate will become the lender.

If you’re planning on loaning or gifting money to one of your children, or if you’ve already done so, there are a few things you should consider when it comes to your estate.

When accounting for gifts and loans to children in your estate plan, one of the most important things you need to remember is to reference it in your will or living trust. As mentioned, ensure that it’s all in writing. Even a promissory note is enough.

That will be the only way to prove what the terms were. An attempt to prove what the terms of a verbal loan involved can be very expensive and difficult for your loved ones. It could even cause a rift between your children and other family members.

In instances when loaning money to your children only involves a verbal agreement, and you don’t want to put it in writing, you can include in your will or trust a mention that the loan becomes a gift at the moment of your death. If you don’t want to forgive the loan, leave in writing that you want the repayment to be made to your estate.

To ensure that your child doesn’t claim that you verbally forgave the debt, it’s a good idea to state in your will or trust that loan forgiveness is only valid if it’s in writing.

Alternatively, you may also want to include in your will or trust that the financial support you’ve made to your child in the form of a loan should be treated as an advance on their inheritance. An advance allows you to give a loved one the money they need without requiring that you make changes to the division of your assets after your death.

To consider a loan an advancement on inheritance, you need to ensure that you keep clear records. That’s especially important if you make a few advancements.

You also want to make sure to speak with your tax advisor about what these advancements, loans, and gifts mean for your federal estate tax, as well as whether there are any other tax implications you need to be aware of.

You have the right to gift and loan your assets as you see fit, but it can be helpful to let other family members know — especially if you have other children. Leave your thought process in writing, too, since your children may want to know why you helped one of them and, in their eyes, not the rest.

Let’s say that one of your children needed a bit of help to make a down payment on their first home. You can leave a message in your will that explains that you would have made the loan or gift to any of your children who asked. Something as simple as that can help avoid conflict.

You also want to let the child receiving the loan or gift know whether their inheritance will be affected. Even if you’re making only slight adjustments to your estate plan as a result of the help you’ve provided, you still want to let them know so that they have an idea of what to expect. Don’t surprise them.

A loan or a gift can seem simple, but it could make certain estate planning strategies more complicated. If you don’t leave everything carefully written, for example, the probate process after your death could be much more arduous for your beneficiaries. There could be an impact on your estate tax exemptions, too.

To avoid these issues, you need to let your estate planning lawyer know what you’re planning on doing. They can offer legal advice that can prevent many future headaches.

Estate planning can be one of the most important things you can do, not just to ensure your legacy but also to help those loved ones who need you most. Whether you’d like to give a child a loan to start a business or gift your child the money they need to finish a degree, you want to have estate planning lawyers by your side to ensure your assets are protected.

At William C. Roof Law Group, we have decades of experience helping people throughout central Florida with all of their estate planning needs. We can help you with the creation of trusts and wills and can address any concerns you have about your options.

Call us to schedule a free consultation with one of our estate planning attorneys.

The contents of this article are not comprehensive, they provide only a general overview of the subject matter discussed. This article does not establish a client-attorney relationship with the reader, and no legal decisions should be made based on the article’s contents. Because every legal matter arises under unique facts specific to the client, no legal decision should be made without consulting a licensed attorney.