Repaying a Loan via Will

[salmoneous]

Situation: Cash-poor father owns a home. One of his three sons gives
him $10,000. Father puts a clause in his will saying that when he
dies, the first $10,000 plus 4% interest goes to the one son. Then the
rest of the estate is split equally between the 3 sons.

Assuming the value of the estate is well under the estate tax
ememption, is this arrangement legal, and would there be any taxes
due?

Thanks,
Sal

 

[Stuart A. Bronstein]

Situation: Cash-poor father owns a home. One of his three sons
gives him $10,000. Father puts a clause in his will saying that
when he dies, the first $10,000 plus 4% interest goes to the one
son. Then the rest of the estate is split equally between the 3
sons.

Assuming the value of the estate is well under the estate tax
ememption, is this arrangement legal, and would there be any taxes
due?

Legally there's nothing wrong with this. The lending son will need to
pay income tax on the interest received at the time. The interest rate
of 4% may be too low, so it might be a good idea to have a contract now
saying the same thing, using the interest rate allowed by the IRS for
this purpose (it can change every month, but you can look in a rate if
you put it in writing).

Stu

 

[salmoneous]

Situation: Cash-poor father owns a home. One of his three sons

Legally there's nothing wrong with this.  The lending son will need to
pay income tax on the interest received at the time.  The interest rate
of 4% may be too low, so it might be a good idea to have a contract now
saying the same thing, using the interest rate allowed by the IRS for
this purpose (it can change every month, but you can look in a rate if
you put it in writing).

Stu

Thanks. As a follow-up, is there any way to do this so the son doesn't
owe income tax on the interest? If one of the 3 sons is more generous
to the father in life, can't the father give that son a bigger piece
of the estate without there being any income tax? Where is the legal
line between a father repaying generously in a will, and a loan
requiring income tax? Note - to be clear, I'm asking where the legal
line is, not how to break the law.

Thanks again for the first answer,
Sal

 

[Seth]

Legally there's nothing wrong with this. The lending son will need to
pay income tax on the interest received at the time.

Why do you say it's a loan? I see it as a gift; if the father later
had a fight with that son, or got suckered by some pseudo-religious
organization (etc.), there wouldn't be any enforceable obligation to
repay. Hence, no loan.

The arrangement is certainly legal.

Seth

 

[Gil Faver]

Why do you say it's a loan? I see it as a gift; if the father later
had a fight with that son, or got suckered by some pseudo-religious
organization (etc.), there wouldn't be any enforceable obligation to
repay. Hence, no loan.

if the clause is put into the will as a condition to the son's giving the
dad $10k, then it is a loan and enforceable, even if the father changes the
will. Of course, proof will be an issue, and there will be a fight.

 

[Seth]

if the clause is put into the will as a condition to the son's giving the
dad $10k, then it is a loan and enforceable, even if the father changes the
will. Of course, proof will be an issue, and there will be a fight.

I'd say that if a contract prevents the clause from being removed from
the will, then it's an enforceable loan. If the father has the right
to change his well and remove the clause, then it's not an enforceable
loan, but a gift.

Seth