A Gift Isn't Always A Gift

If you as a parent give a substantial amount of money to one of your children, it is important for the parents to decide how they want to treat that money.  First, if you decide it is a loan, it is important to have a proper promissory note drawn up and terms of payment.  It is also important to determine what will happen if the loan is not repaid.  For example, do you want the loan to be forgiven if you die, or should the unpaid balance be deducted from that child's inheritance.

But what if you decide to treat the amount as a gift.  If you have more than one child, it is very important to understand and document how you want to address this gift.   If the other siblings discover a gift  was made to one of them but not all of them, it could create some resentment or fighting after both of the parents have  passed away.

When making a gift to a child, you need to decide if this is an outright gift with no bearing on future inheritance, or rather, do you want the gift to be considered an "advance" of future inheritance.  In this case, the gifted amount would be deducted from that child's share of their inheritance at the time they are to receive their inheritance.

So in simple terms,  if you chose to treat the amount given as a "gift", you will need to do one of the following (depending on your wishes):
1) Intend to provide disproportionate amounts to your children through gift and inheritance
2) Gift equalizing amounts to all siblings (be sure to understand any tax implication of your gifting)
3) Consider the gift an advance on inheritance.

Whichever option you choose, you should be sure to document, document, document - either with an update to your will and/or trust, in other writing, or through documented action.  If you don't, there will most likely be a a great deal of fighting and frustration among your children after you have passed away.

Disclaimer: The information provided is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem. Use of this information or any related information does not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual authors and does not reflect the opinions of any firm or attorney.

Happy New Year! Happy New Tax Law?

Well, the year of waiting to find out what would become of the Estate Tax is finally answered, or is it? A better statement would be that the answer will be temporarily postponed for another two years but in the meantime… here’s a tax law to hold you over and to even cause you additional planning questions.


Last year was there was no federal estate tax law in effect. Now, the new tax law (effective 1.1.11) provides two options to the surviving heirs of individuals who died last year. They can either follow the 2010 rules – no federal estate tax, or follow the new 2011 tax rules which provide individuals with a $5 Million dollar exemption.

If you chose the new 2011 rules you can pay estate tax (35%) of a taxable estate over the $5 million exemption and your heirs get a “stepped up basis” of all such inherited property. “Stepped up” means that the cost basis of any property you inherit is determined by the value of that property at the date of death of the previous owner. This is important for capital gains tax savings when the property is later sold.

Alternatively, if chose to follow the 2010 tax rules, you will not pay any estate tax regardless of the size of your estate and the estate will be subject to a modified “carryover basis” rules. When you inherit property under this option, the cost basis of the property stays the same as it was for the previous owner. (Typically the price they paid plus capital improvements). When you sell the inherited property, your capital gains tax will be based on the older and typically lower cost basis.

The carryover however, is modified in that an heir can still step up the first $1.3 million of an inheritance, and a surviving spouse can take another $3 million. Anything in excess of these amounts would be fully carried over at the original cost basis.

So for anyone administering a large estate for a 2010 death, many options are available and careful consideration needs to be made with your tax advisor to determine which tax rules will be more beneficial to your estate. And the lingering question, what will happen if you die in 2013 when we may potentially be facing another period of uncertainty

Disclaimer: The information provided is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem.