You've created an estate plan through a will or a trust, but you may still intend to make distributions to your loved ones during your lifetime. You may not have considered it, but these lifetime distributions can create some problems later on. To save time, money, and prevent suspicion, it is important that you clarify now whether these distributions are gifts, loans, or advancements.
When does this become an issue? Consider the following circumstances:
- You put money in a grandchild's education fund.
- You offer temporary income assistance to one of your children while they are struggling financially.
- You invest in a child's business venture.
- You give land or provide a home to one of your children but not the others.
- You pay for a child's medical or legal bills.
- You pay for a family member to go to rehab or support them during recovery.
- You pay off a significant creditor liability for a family member, such as student loans or credit card debt.
When you do this, have you given that person a gift, have you made a loan, or have you given an advancement on future inheritance? If you don't clarify now, it could cause a great deal of suspicion, tension, or resentment among your loved ones after your death.
You have given a gift when you have no expectation that you or your estate or trust will be paid back, and you don't expect for the recipient's future inheritance to be reduced by the gift amount. Keep in mind that you can give a maximum of $15,000 per recipient per year without affecting your estate tax lifetime exemption.
If you intend your distribution to be a loan, then a few things need to happen. First and foremost, put it in writing. Don't leave this to a handshake or rely on an unspoken understanding. I know it seems strange to ask a loved one to sign a contract for the loan, but for your sake and theirs you need to be specific about what is expected. Will there be any interest owed on the loan, or do you want the loan to be for 0% interest? How long does the recipient have to pay you back? Is the loan forgiven if you or they die before it is paid back, or do your estates become the parties until the loan is repaid?
The point is that there needs to be clear mutual understanding that this is a loan and not a gift, as well as what the terms of the loan are.
In addition to the signed contract, your will or trust needs to reference the loan and describe its terms so that your executor or trustee and the rest of your family understands what is expected.
Note: If you plan to forgive the loan upon the death of either party, you should first consult with your CPA. This could transform the loan into a gift and have tax consequences for one or both parties.
If you want to distribute money to a family member during your lifetime without changing the relative proportions of division of your assets upon your death, you can consider this distribution to be an advancement of future inheritance. For example, if a loved one stands to inherit 25% of your assets upon your death, but you distribute $50,000 to them during your life, your estate plan could make it explicit that their share should be reduced by the amount of the advancement so that the other beneficiaries do not feel that the beneficiary received 25% + $50,000.
If you intend your distributions to be considered advancements, then your will or trust needs to contain clear provisions, and you must keep accurate records, particularly if you make multiple such advancements.
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Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. It is always best to speak with an attorney about your questions, assets, concerns, and needs.