Loan, Gift, or Advancement: Why the Classification Matters

We all want to provide financial help to our loved ones, but it’s important to understand that how the money is classified will affect your estate planning!

Understanding the Differences

The intent behind the transfer of the money is key when determining if it will be considered a loan, gift, or advancement.

Loan: If there is an understanding that the money you gave to a loved one is to be paid back, this is considered a loan. If the money is not paid back before you pass away, the sum is still owed to your estate. You could decide that you will forgive the debt if it is still outstanding when you die. In order to do this, there needs to be specific language in your will or trust. Alternatively, if the borrower is set to receive an inheritance from you, an arrangement can be made that his or her inheritance will be reduced by the amount of the loan.

Gift: If you transfer money to a loved one without expecting to be paid back and without any additional considerations made in your will or trust, it is a gift. It is important to note, if the gift is for an amount over the annual exclusion, which is $15,000.00, a gift tax return will need to be prepared and filed with the Internal Revenue Service. If your estate planning goal is to make the same gifts to  all of your beneficiaries, making a gift to one of them during your lifetime may upset this balance.

Advancement: If you want to give money to a beneficiary during your lifetime but don’t want it to disrupt the distribution scheme contained in your estate plan, you can consider the money an advancement. In effect, the person will be receiving a portion of his or her inheritance ahead of time. That person’s share of the estate will be reduced by the amount of the advancement when you pass away. In order for this to be properly carried out, there are particular provisions that must be contained in your estate planning documents.

We Can Help! If you are thinking about transferring money to a family member or friend, give us a call to schedule an appointment so we can discuss how  the transfer can or will affect your estate planning goals.