A significant portion of wealth transfers are lifetime transfers from parents to their children (or grandchildren) while the parents are still alive.
Let us examine why and how such transfers take place and what it means for those involved.
Often due to their immediate life circumstances adult children ask for a portion of their anticipated inheritance from their parents while they are still alive.
The children may need money to make a down payment on a home, to start a business, or to pay off their existing creditors.
Sometimes, parents agree and decide to help their children. Such help will either come as a loan or as a gift to the child. Each approach entails different income tax, estate planning, and future Medi-Cal eligibility outcomes.
For a loan to be respected for income tax purposes commercially reasonable interest must be paid. Otherwise, especially with intra family loans, the IRS may impose a reasonable interest rate or else find that a gift was made of the foregone interest not charged.
The interest paid (or imputed) is ordinary income to the parent/lender for income tax reporting purposes.
Depending on the purpose of the loan, the interest may or may not be a deductible expense on the child's income tax return.
Other issues raised by parental loans are whether they are secured by deeds of trusts against real property owned by the children (in case of default) and whether any unpaid balance will be forgiven at the parent's death or else be deducted from the recipient's share of the parent's estate.
Any assets, including money, transferred as a gift will be considered should the parents later-on apply for Medi-Cal within Medi-Cal's look period.
Medi-Cal's present 30-month look back period will soon double to 60 months. Parents may not realize that their gifts to their children can later result in a period of denial of eligibility for Medi-Cal benefits down the road, such as when the parents go into a skilled nursing home.
Next, lifetime gifts and unpaid loans are factors to consider when doing one's estate planning.
For those parents who wish to treat all children equally, as is often the case, it will only make sense that any substantial lifetime gifts later count as advance distributions of inheritances when dividing the parent's estate. Otherwise, an equal division of what remains at death means that those children who received more gifts during life are favored in end.
This unevenness is entirely appropriate if that is what the parents choose. What is unfortunate is if ambiguity over the parent’s intentions exists because then the children may quarrel amongst themselves over whether or not the lifetime gifts should count as advances towards the gift recipient's share of the parent's estate.
To be sure, any existing divisions (faults) amongst the surviving children will get played out in such disputes after the parents die.
To resolve the outcome of such disputes, it may be helpful if the parents' estate plan expressly addresses the issue of whether lifetime gifts count as advances of inheritance.
The foregoing discussion shows why estate planning must consider the whole picture of the parents' lifetime relationship with each child.
What is not expressly addressed by the parents in life may later create problems amongst the surviving children who see things from their own vantage points. All the more reason to tie up any loose ends.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at email@example.com or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .