Family Loan vs. Family Gift
When it comes to inheritance and tax planning, what’s the best way incorporate either a gift or a loan from your aging parents?
It's wonderful that your parents want to give you money to help with your business, your kids’ college tuition or even a home improvement project. Some parents would rather that they give you the money while you are still growing instead of when you are older and no longer need it. Structuring an inheritance like this can lift a huge burden off of your shoulders.
Here are some factors to consider.
First of all, estate planning for your parents is so important. If they don’t already have updated wills or trusts (if needed), that’s the first place to begin. Getting their affairs in order will be the best gift to you, giving you peace of mind, mitigating taxes and knowing that there's a plan. You'll be very emotional whenever your parents pass away. All sorts of memories, good and bad, surface and add to the grieving process. Having a "blueprint" to follow after any loved one has passed is a gift. Sometimes children are reluctant to talk about this time with their parents. They don’t want to come across as being greedy or selfish. Some clients have had success by completing their own estate planning, then using that situation as an opener to talk to their parents about their estate. A good opener might sound like,
“Hey mom and dad, I recently updated my own will and started a small trust. Do you have any advice for me as I navigate these new waters? By the way, what have you done with your own planning?”
Find an experienced and caring estate planning attorney to help your family.
If you take a loan from your parent, it must be carefully documented. You would also need to draft documents that show the original loan amount, date, etc. You would also need to keep a schedule of payments and be charged a "reasonable" interest rate by your parents. Definitely work with a good tax preparer and tell them in advance that you are taking a loan from your parents. They can help you avoid pitfalls at tax time!
Gifts are an entirely different manner. Each of your parents can gift anyone up to $17,000 in 2023 without paying a gift tax. This means that you could get $34k total this year from them. Plus, if they haven't given you anything before, they can go back 5 years and lump it all together. The exclusion amount was $16k last year, $15k in 2021, etc. The entire amount that they gift to you will be added towards the $12.4 million lifetime exemption (this amount increases every year with inflation).
Keep in mind...
- They could also give a gift to your siblings, your spouse or children or both.
- This lifetime amount is supposed to revert back to about $6 million in 2026. This is called the "sunset" of the TCJA (Tax Cuts and Job Acts in 2018). So, time is ticking on this giant exclusion. No one knows if it'll be extended or not.
- Your parents will need to file form 709 with their tax return.
- If you are a business owner and paying off a business credit card, for example, you can receive the gift into your personal checking account. Then you can pay off your debt. Make sure that it is recorded as an "owner contribution" in the books.
Receiving large amounts of money from a parent can be a truly emotional event. It causes both the parent and the child to look at our mortality, which can be a difficult conversation at any time in life. From a planning perspective, having these conversations and developing a plan early in life will serve you well. The survivors will receive a gift that goes far beyond the money and becomes peace of mind and less stress during a hard transition. The deceased parent can rest well knowing that they’ve done their best for their children during their lifetime and beyond. I encourage you to have these hard conversations while you are still able. If you need a helping hand, schedule a call with me here.
Until then, be well!
