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Your client may not be too concerned about handing money over to a beloved and trusted family member, but the IRS takes an interest in money moving from one person to another.
If the financial assistance is truly a gift, no paperwork is needed—as long as the giver doesn’t give more than $15,000 to the recipient in a calendar year (that’s the figure for the 2018 and 2019 tax years).
If the total of all gifts from the client to the recipient exceeds $15,000 in a particular year, the client is required to file IRS Form 709 with his tax return that pertains to the year in which the gift was given. However, if the client uses part of his “lifetime exemption” (currently $11.18 million) to make the gift, no gift taxes will be owed.
If the money is truly a loan, it’s in your client’s best interest to get the terms in writing, signed by both the lender and the borrower(s).
First, it establishes the amount, loan length and the annual interest cost that the borrower and lender will have to report for tax purposes. And the signatures ensure that all parties understand and agree to the terms of the loan.
Finally, the piece of paper means that if the borrower runs into financial trouble down the road, your client may have some recourse to get in line with any other creditors to try to recoup some of her money from the borrower’s assets.
The larger the sum in question, the better it will be for the client to consult with a CPA and an attorney to make sure all of the details of the loan are reported correctly—both at the time of the transfer and in the future (if loan payments are made). Clients who are courageous enough to do it themselves should at least use a program like LoanBack to create the original loan document and calculate the ongoing interest cost.
Lump sums pulled from checking or savings accounts that aren’t tax-sheltered shouldn’t create too many immediate issues. But any other sources could have unintended (tax) consequences.
Selling stocks or mutual funds could generate unwanted capital gains taxes and force the clients to start digging around for obscure cost basis information.
Pulling money from IRAs, 401ks and annuities is a little easier but can be a lot more expensive when the withdrawals are added to the client’s taxable income.
Even if the funds are pulled from sources with no tax consequences (such as savings or Roth IRAs), depleting those accounts now could mean a bigger tax bill in the future if the client needs to withdraw taxable money to support herself.
Throwing money into a family’s dynamics can trigger an eruption of long-held grievances, create new controversies, and add tension to every future gathering and interaction.
Communication can help mitigate any misunderstandings. The client may want to contact each of the family members who are the in same “tier” as the recipient of the current cash (such as all the adult children) and let them know that they, too, can get in touch if they have financial needs now or in the future.
Note, however, that announcement can initiate a withering barrage of demands on your client (and his assets), so he should consider how treating other family members to the same type of assistance might affect his financial and emotional well-being.
Any unpaid loans or unfulfilled promises of financial gifts to family members should be incorporated into the client’s estate plan, so that if he dies with any obligations outstanding, the final bequests can be adjusted accordingly.
Such steps could include deducting the amount owed by any borrowers from their respective portion of the estate or designating how any promised-but-unfulfilled assistance will be accounted for.
Updates should be made to the estate plan as material payments are made to loans or as new gifts are given.
For clients who are unsure how to best help certain relatives now without jeopardizing the clients’ financial security or family harmony, a compromise might be in order.
First, have the family members in need apply for a loan at a traditional bank or credit union to cover the big expense in question. The client may have to co-sign for the loan, which means she will be on the hook for it if the borrowers can’t make timely payments.
Then, if and when the borrowers are unable to make the monthly payments on the loan, the client can step in and make the payments, keeping in mind the aforementioned annual and lifetime gift restrictions. Every time the client makes a payment on the loan, she could also give a similar amount of money to other family members of similar standing.
For instance, let’s say a client’s adult child is buying a house and needs a 30-year fixed rate mortgage of $200,000 at 4.5 percent. The monthly mortgage payment would be about $1,000. The client would co-sign for the mortgage, and then if the kid runs into trouble down the road, the client would make the $1,000 monthly payment and then give $1,000 to each of the borrower’s siblings.
Making smaller gifts now to all family members makes sure that they get the money when it matters most but also ensures that the money will last at least as long as the client lives.
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