ESTATE PLANNING: Ways to handle an advancement on an inheritance

2014-01-04T11:03:00Z ESTATE PLANNING: Ways to handle an advancement on an inheritanceChristopher Yugo Times Business Columnist
January 04, 2014 11:03 am  • 

Q: I am considering giving money to one of my children. How do I account for the money in the will? What happens if he pays me back before then?

A: There are a couple of different ways to handle the transferring of money to a loved one during your lifetime. However, first you need to decide if it is a gift or a loan. It can be handled under either circumstance but it's best to decide first.

If you are making a loan, I strongly suggest that you ask them to sign a promissory note acknowledging the loan. Even if you don't expect them to pay you back, it's best to get it in writing.

I would also suggest you include an interest rate to comply with any IRS issues that may arise. It can be the minimum rate required by the code, but it should be something. Not only will it comply with the relevant tax laws, it will also make it clear to the person receiving the money that this is a legitimate business transaction, and you intend to treat it as such.

Once you have made the loan, acknowledge it in the will or trust. You can state any outstanding amount should be taken into account and treated as a part of their distribution. Your personal representative can add the unpaid balance back into the taxable estate for accounting purposes and then make everyone whole.

Because the outstanding balance of the loan might be a contentious issue, it's important to get the terms set out in the promissory note I mentioned above. Remember, although you know the terms of the loan, you won't be there to remind everyone and the recipient of the money may not remember the terms the same way or perhaps the fact that it was a loan at all.

It's even easier if the money is gift or an advancement of an inheritance. In that case, you can simply make specific distributions to each of the other children in an amount equal to the amount gifted. That way, everyone can receive the same amount of money before the residuary distributions take place.

It won't be exactly the same, since the person receiving the money during your lifetime will have the use and enjoyment of the money during your lifetime, but hopefully it will make everyone feel equal.

Finally, since there isn't an inheritance tax anymore, bringing the note back into the estate won't have a death tax issue, although it may have a minor income tax consequence. If you have an estate that may be subject to federal estate tax, it's probably a good idea to discuss the consequences with the attorney and accountant before making a decision how to treat the money.

Opinions are solely the writer's. Christopher W. Yugo is a Crown Point attorney. Address questions to Yugo in care of The Times, 601 W. 45th Ave., Munster, IN, 46321 or to Yugo's information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant or estate-planning specialist.

Copyright 2014 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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