Intra family loan / estate question


E

ed

My wife and I have one child . We both gift him $11,000 per
year (it will be $12,000 in 2006). We also hold a personal
note for $180,000 on which we charge him an annual (AFR) rate.
Unfortunately my son used the money to purchase stock in a
company that is only currently worth $7000.

It is my understanding that the only way for us to
cancel/forgive the note without creating a gift tax
liability is for my son to declare bankruptcy, which
he won't do.

Is there any other way for us to forgive the note without
creating a gift tax liability or without using part of our
estate tax exemption?

Thank you.
 
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S

Stuart A. Bronstein

ed said:
My wife and I have one child . We both gift him $11,000 per
year (it will be $12,000 in 2006). We also hold a personal
note for $180,000 on which we charge him an annual (AFR) rate.
Unfortunately my son used the money to purchase stock in a
company that is only currently worth $7000.

Is there any other way for us to forgive the note without
creating a gift tax liability or without using part of our
estate tax exemption?
You and your wife each can give him $12,000 per year. So do
that on a note for the next 20 or so years. Looks like you
have to charge him a minimum of 4.18% interest under IRS
Revenue Ruling 2006-7. When you compound that at $1000 per
month it will come out just over 23 years.

Stu
 
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P

Phil Marti

ed said:
My wife and I have one child . We both gift him $11,000 per
year (it will be $12,000 in 2006). We also hold a personal
note for $180,000 on which we charge him an annual (AFR) rate.
Unfortunately my son used the money to purchase stock in a
company that is only currently worth $7000.
If you haven't noticed, he doesn't exactly fall into the
financial wizard category.
It is my understanding that the only way for us to
cancel/forgive the note without creating a gift tax
liability is for my son to declare bankruptcy, which
he won't do.

Is there any other way for us to forgive the note without
creating a gift tax liability or without using part of our
estate tax exemption?
Well, how's about canceling $24,000 of the note per year
until it's paid off rather than pouring more cash down that
particular rathole?

Just curious here. How exactly do you expect your son to
survive after you're dead and can no longer feed him cash?
If past is predictor of future, he'll run through his
inheritance before the second of you is cold. I'm sure you
love your son, but you do him no favors by standing between
him and adulthood.

This mess smells of do-it-yourself estate planning, which is
one of the worst ideas ever to come down the pike. Instead
of disabling your son through your gifts, spend some money
on an attorney for estate planning. Be sure to bring up the
concept of a "spendthrift trust."
 
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J

joetaxpayer

ed said:
My wife and I have one child . We both gift him $11,000 per
year (it will be $12,000 in 2006). We also hold a personal
note for $180,000 on which we charge him an annual (AFR) rate.
Unfortunately my son used the money to purchase stock in a
company that is only currently worth $7000.

It is my understanding that the only way for us to
cancel/forgive the note without creating a gift tax
liability is for my son to declare bankruptcy, which
he won't do.

Is there any other way for us to forgive the note without
creating a gift tax liability or without using part of our
estate tax exemption?
If you were charging him 5% interest, that's $9,000 per
year. But you may gift him $24,000 per year (the 12,000 is
per person). So this may take some time, but he can use that
money to 'pay you back'. Given the increased estate tax
exemption, that wouldn't be too bad a thing either. One way
or another it's really the same thing, no? By doing it now,
you can gift him each year, and he could actually keep the
money, if that's your goal.

(BTW, if you are concerned about the estate tax, I hope any
life insurance you have is either held by your children, or
by a trust. That's a nasty thing to have fall back into your
estate on your passing)

JOE
 
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E

ed

They are already giving him the exemption amount each year.
You're reply then is not correct.

Moderator:
I believe his reply was intended to say "stop giving him
cash and start giving his a reduction of the note.
 
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S

Seth Breidbart

ed said:
My wife and I have one child . We both gift him $11,000 per
year (it will be $12,000 in 2006). We also hold a personal
note for $180,000 on which we charge him an annual (AFR) rate.
Unfortunately my son used the money to purchase stock in a
company that is only currently worth $7000.
Is there any other way for us to forgive the note without
creating a gift tax liability or without using part of our
estate tax exemption?
Not above the usual limit ($24K/year, $48K/year if he marries).

If you give him appreciated stock and he sells it, he can offset
the capital gains with his capital losses. That won't help him
any (the value of stock you can give is limited to the amounts
above), but would save you some taxes.

Seth
 
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Gene E. Utterback, EA

ed said:
My wife and I have one child . We both gift him $11,000 per
year (it will be $12,000 in 2006). We also hold a personal
note for $180,000 on which we charge him an annual (AFR) rate.
Unfortunately my son used the money to purchase stock in a
company that is only currently worth $7000.

It is my understanding that the only way for us to
cancel/forgive the note without creating a gift tax
liability is for my son to declare bankruptcy, which
he won't do.

Is there any other way for us to forgive the note without
creating a gift tax liability or without using part of our
estate tax exemption?
To forgive the note - NO.

But I suspect that what you want to do and what you posted
are slightly different issues. If you are interested in
canceling the note you may be able to do that without any
gift tax consequences and without using part of your unified
credit exemption, but you will need to work with a tax
professional who understands how the system works. And you
will need to make demands of your son - though it is
possible for him to get out this without filing for
bankruptcy.

What you didn't post was enough information to make a proper
determination and I'm not sure you should post it here. I'd
need to know the details of the loan as well as some
personal details about your son and your relationship with
him before I could tell you if you can cancel the note
without repercussions. I can tell you this much though,
while what I think you want to do can be accomplished it is
aggressive, though legal, and can be distasteful and cause
problems with family relationships.

If you like, contact me directly and we discuss the details.

Gene E. Utterback, EA, RFC
 
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S

Stuart A. Bronstein

Gene E. Utterback said:
What you didn't post was enough information to make a proper
determination and I'm not sure you should post it here. I'd
need to know the details of the loan as well as some
personal details about your son and your relationship with
him before I could tell you if you can cancel the note
without repercussions. I can tell you this much though,
while what I think you want to do can be accomplished it is
aggressive, though legal, and can be distasteful and cause
problems with family relationships.
I don't think it's particularly difficult or aggressive.
I've arranged similar things for clients. But you do have
to be very careful because it is quite easy to get tripped
up.

Stu
 
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Gene E. Utterback, EA

I don't think it's particularly difficult or aggressive.
I've arranged similar things for clients. But you do have
to be very careful because it is quite easy to get tripped
up.
In the particular context of this case, "aggressive" was
meant to apply to the interpersonal relationships not the
application of law. Sorry for the confusion.

Gene E. Utterback, EA, RFC
 
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