By Letha Sgritta McDowell, CELA CAP
Often clients will ask about giving or loaning money to family members. Questions range from “Will I pay tax?” to “Is this a good idea?” While money and family decisions are extremely personal, there are some considerations or “ground rules” which remain universal.
The question that arises most frequently is whether there are tax consequences to the gift. Many have heard of an exemption but don’t understand what that means. The recipient of a gift never pays tax on the gift so there should never be a concerns that well-intentioned gifts come with a tax consequence to the recipient. However, in some rare instances, the donor of the gift pays tax. Current tax regulations allow an individual to give $15,000 per recipient ($30,000 if a married couple is making the gift and each spouse joins in the gift) without reporting the gift to the Internal Revenue Service. The $15,000 “limit” isn’t actually a limit; instead the $15,000 is a reporting threshold. Current tax regulations allow an individual to transfer $11.4 million without paying tax. Technically the $11.4 million is a unified credit, meaning that amount can be transferred either during lifetime or at death or in some combination. Therefore, if an individual gives their child $1 million as a Christmas gift (above the $15,000) they would report the gift using a Form 709. This gift would result in no tax due, however, at their death, they would only be allowed to transfer $10,415,000 without paying any tax ($11,400,000- ($1,000,000-$15,000)).
Therefore, the $15,000 annual exclusion only makes an impact for individuals with assets exceeding $11,400,000. And, since the vast majority of Americans do not have assets exceeding that amount, the exclusion is fairly irrelevant. There is the potential for this amount to “sunset” in the year 2026, however, even if that were to occur, the exemption is still at $5.49 million.
Since taxes are not an issue for most, then the conversation can focus on whether a gift is a good idea. First, the donor should examine whether he or she has the resources to make the gift. Often I’ve encountered an older adult (parent/grandparent) with very little in savings, who no longer works, who is also trying to give money to a child or grandchild. If that individual doesn’t have sufficient resources to pay their own expenses for the remainder of their lifetime, including potentially catastrophic long term care costs, then I do not recommend gifting. Especially in cases where the recipient has the ability to work, earn a living wage, and still save for their retirement.
Next, assuming the donor has the financial means to make the gift, I recommend considering the motive behind the gift. Is the gift being made to assist the recipient with something worthwhile, such as start-up capital for a business or a down payment on a house? A gift from a willing donor may be just what is needed to make the recipient successful. If a donor is concerned that making such a gift will spoil a child’s drive to succeed or result in a lack of appreciation, then I encourage them to consider the recipient’s personality. The donor will already know if the child has the mindset that they will use the gift to leverage to something better. The donor is aware of the ambition, drive, and personality of the recipient and an individual who has already shown a lack of appreciation or a lack of drive will not change simply because of a gift. Similarly, someone driven to succeed will not change simply as a result of a substantial gift.
Closely related to family gifting is loaning money to family. No interest loans carry no tax consequences and the considerations should be the same for gifting as for loaning. Is the loan just what the borrower needs to leverage into success? If so, then the loan can be a welcome way to aide in someone’s future. When individuals make loans, they do so with the expectation of being repaid. However, when advising clients regarding a loan to family, I encourage them to treat the loan as if they will not be paid back. Unfortunately, often family loans are never repaid leaving hurt feelings and frustration. If the lender approaches the situation with no expectation, then he or she is pleasantly surprised when one is repaid. In addition, the ability of the lender to make the loan should be reviewed with the expectation of not being re-paid. Thus the lender should have sufficient income and savings to reasonably cover life expenses.
Finally is the issue of how gifts or loans work for purposes of an inheritance. A person’s estate plan is extremely personal and their decision about who should benefit after their passing should be their reflection of wishes and not based on obligation or other societal norm. That being said, many wish to treat their children or other family equally and, if they have made gifts or lent funds not yet re-paid, then provisions can be made within an estate plan to ensure equality. It is critical to make the drafting attorney aware of such gifts or loans as well as the desire to equalize and then to review account titling and beneficiary designations to ensure they are consistent with the plan.
While family gifts and loans should be carefully considered before the transaction is made, they can be extraordinary ways to assist in a loved one’s success with the added benefit of the donor seeing the benefit during their lifetime.
Ask Kit Kat: Outer Banks Star
Hook Law Center: Kit Kat, what can you tell us about a mule named Raymond who lives on the Outer Banks, NC and thinks he’s part of the herd of wild horses?
Kit Kat: Well, Raymond is indeed a mule. His daddy was a donkey that was once owned by a petting zoo in Virginia Beach. Somehow, his daddy made his way to the Outer Banks of North Carolina, and mated with one of the mares in the wild herd there. Hence, Raymond. He’s now 20 years old, and could live as long as 30-50 years. Visitors to the Outer Banks sometimes question what they have seen when they visit. Is there really a mule that is part of the herd? Meg Puckett or Jo Langone of the Corolla Wild Horse Fund answer them in the affirmative.
What draws people to Raymond are his antics. He doesn’t let his smaller stature prevent him from tousling with stallions. Sometimes he gets the better of the stallions and sometimes he doesn’t. When they get too close to the mares he likes to spend time with, he will nip at the stallions’ legs or turn around and kick them with his hind legs. If a foal is produced by a successful mating between a stallion and a mare, Raymond, who as a mule is infertile, is very protective of it, and treats it as if it were his. Raymond also tends to be more vocal than the wild horses. He brays and makes other noises which can be quite loud at times. The visitors to the Outer Banks are mesmerized by his behavior.
Meg Puckett of the Corolla Wild Horse Fund, which manages the herd, says, “I can’t express how good he looks for his age and the rough life he’s led. He is tough.” He’s had a little bit of help from a local veterinarian. When it was noticed that his hooves were not wearing down naturally by walking on the sand dunes as happens with most of the horses, a veterinarian intervened. Raymond was sedated, and his hooves were ground down a bit. It was kind of a risky enterprise, but it was successful. With Raymond’s pain relieved, he’s back to his old self—frolicking and standing up to the stallions.
So next time you’re on the Outer Banks of NC, you may want to see if you can catch a glimpse of this wonderful creature! (Jeff Hampton, “Everybody loves Raymond,” The Virginian-Pilot, June 17, 2019, p.1 & 9)