A Gift or Loan? Estate Planning Mistakes to Avoid

Written by Robert Nickerson

Here’s a quick scenario for you. Let’s say you have a child that wanted some extra money to help buy his dream home. You want to be sure that he’ll be safe with it, but you also want to check your estate plan (if you have one already). You understandably want to figure out how to handle this kind of gift if you can even call it a gift at all. So your question is probably whether to make reference to it in the estate plan or to treat it as an early development inheritance.

In order to figure that out, here are some things you need to figure out.

You first need to figure out what it is you want to give your child: a loan or a gift. It’s hard to figure that out as the lines are often blurred. It’s best to remember that the two are completely different things. A loan is when you expect to be paid back, and I mean that fully. Not a partial loan or a “Pay when you can and maybe get it all done” loan. Even if it wasn’t documented, if it’s something your gonna get back, then it’s a loan. If it’s in the category of not expecting any payment back, then it’s a gift.

There are a cople of reasons why it’s important to distinguish the two. If it’s a loan, then there is a set debt and is now an asset of the estate. For example, if you were to loan out $200,000 to a child and it’s not repaid before you die, they’ll still owe money to the estate.

If it was a gift, then the only thing you’ll need to think about is with it be being reported as a gift property. It will not likely affect the estate unless noted.

A good way to handle a gift is to note that the gift was an advancement and to use that as a reduction in the inheritance share.

It’ll be more complicated if the funds were a loan. The debt can be forgiven, but it’ll be a tax nightmare without the right paperwork. Since it would be a part of the estate, a personal representative should be able to recover it. It’ll help calculate it in terms as a part of the inheritance. 

Anyone has a lot of options with how money and inheritance is treated when their alive. When their dead, the options become narrow, so it’s better to think about this now. Talk to your attorney about it. 

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