Gift tax?

[tacks]

I know of a fairly well off client who's trying bail out his son. His son is in deep in debt. The father is concerned about getting hit with gift tax when paying off his son's bills which are well INXS of the 12 thousand threshold (or whatever it is).

I would think that they could write up a loan agreement between son and father which would prevent them from getting hit with gift tax. Is this true? I know nothing about gift tax.

Maybe they'd need to get the signed loan agreement notarized.

[I imagine that they should also look in to some kind of Consumer Debt counseling program.]

thanks for reading

[Bees Knees]

If the $13,000 annual exclusion is exceeded, a gift tax return must be filed. However, there is no actual gift tax to pay until lifetime gifts exceed $1 million.

[Gretel]

I think a loan agreement could work and then forgive $13,000 each year.

However, if it never was intended to be a loan I wouldn't suggest such to a client.

[Corduroy Frog]

A Loan is Not a Gift

by any measurement.

However, if the loan defaults, then there is gift.

We're not in this business to moralize, but my guess is the son would be in a whole lot less trouble if well-to-do parents had not consistently bailed him out in previous years.

All this to say that the behavior is likely to continue, and the prospect of such a loan being defaulted is very real.

An ongoing question might be: How is the gift calculated if the loan is defaulted? The entire remaining principle? The amount overdue? The original post seems to imply that bailing out the son is the primary objective and not investing in a loan. Yet another reason for the loan to be defaulted.

I'm thinking the only way for this to be put to rest is for the loan to be made, and then sold to a bank, which will most certainly require collateral. If the father has to put up the collateral, then this is, again, most likely a gift.

It appears as though it is impossible to write enough statutes to cover all the various things that can happen in family situations.

[JoshinNC]

More experienced professional

Maybe you should pass this client, or at least this part of his work, off to someone more experienced. You don't even know the annual gift tax exclusion for the year in question and gave a flippant, "or whatever it is" in your first response. Do this client the service he is due and let someone with a better understanding of these types of situations advise him, pay close attention, learn a little more through self study and then come back to these types of transactions.

[Snaggletooth]

Tacks

Tacks, this is a good topic to post, and a good thread for discussion. Don't be discouraged or insulted by posts such as the above. Maybe Josh will reconsider and delete or rephrase it.

Most of us remember times in our past when we considered ourselves neophytes. In my case, after lo these many years, I am still prone to attacks of ignorance and folly from time to time. I've been on this board a long time and remember some of our members when, by the content of their questions, I considered them newcomers to the tax practitioner industry. Some 3-4 years later, some of these are now quite knowledgeable, and no doubt extremely competent in what they are doing.

In fairness to comments made by Josh, the affairs involved in gifting and estate are areas where your client must have significant expertise, and his analysis should be taken at value.

Keep up the questions!

[tacks]

Sincere thanks to all who’ve read and responded.

Maybe you should pass this client, or at least this part of his work, off to someone more experienced.... Do this client the service he is due and let someone with a better understanding of these types of situations advise him….

That's a fair comment.

Going back I see that my initial question was not well written.

We're not in this business to moralize, but my guess is the son would be in a whole lot less trouble if well-to-do parents had not consistently bailed him out in previous years.

All this to say that the behavior is likely to continue....

Yes. I imagine that is often the case but not so much here. The son is somewhat accomplished and has been self sufficient up until recent times.

And while this client might be ‘well off’ compared to some of my other clients I believe that most on this board would see him more in the ‘average’ range. ‘Well Off’ was a poor choice of words on my part.

It might be that the ‘bail out’ might merely be the son refinancing some high interest credit card debt into something more reasonable. (And then maybe the father’s help is not really needed.) So I do NOT believe that the father necessarily needs to start worrying about gift tax – not yet anyway.. We’re still in the ‘discussion’ stage.

So it might be that the advice from this outfit would suffice.

http://www.cccsatl.org/whatWeDo/index.jsp

But if more issues pop up I’ll certainly not hesitate to refer him to an associate of mine who’s experienced with estate and gift. There have been several times when I’ve referred work to other professionals and vice versa.

And as I’m writing this I’m thinking that I should tell my client that I have a friend who does estates. And that we/he might decide to use him in the future.

learn a little more through self study and then come back to these types of transactions.

This is also a fair comment. Normally I would have done a little leg work before posting such a question. But I just got lazy.

[tacks]

Tacks, this is a good topic to post, and a good thread for discussion. Don't be discouraged or insulted by posts such as the above....

Keep up the questions!

Thank you, Snaggletooth. That's nice of you to say -- encouraging.

I would be very discouraged and upset with myself if I discovered that i did a disservice to one of my clients -- screwed up their return, missed massive deductions and/ or rebates, gave bad advice, etc. I think most on here would agree that some preparers out there ought to be ashamed of themselves for the 'work' that they’ve done. EDIT: I would never want it to be that someone's grandmother missed out on 850 dollars worth of state rebate because she gave her business to me!

If someone on this forum suspects that I'm overlooking something then I’m happy to hear about it. Far better that I get some negative criticism on here than one of my clients gets it from the IRS. A little ‘poke’ or ‘jab’ on here really isn’t so much of a big deal. In fact, it's really a small price to pay. Isn't it?

[Gretel]

Thank you, Snaggletooth. That's nice of you to say -- encouraging.

I would be very discouraged upset with myself if I discovered that i did a disservice to one of my clients -- screwed up their return, missed massive deductions and/ or rebates, gave bad advice, etc. I think most on here would agree that there are some preparers that ought to be ashamed of themselves for the 'work' that they’ve done.

If someone on this forum suspects that I'm overlooking something then I’m happy to hear about it. Far better that I get some negative criticism on here than one of my clients gets it from the IRS. A little ‘poke’ or ‘jab’ on here really isn’t so much of a big deal. In fact, it's really a small price to pay. Isn't it?

I couldn't agree more with you. Makes my heart real warm. Your posts also make me realize that being "expert" in some areas and/or doing lots of research doesn't mean that a question looks stupid to others. We are much too fast with judgments and conclusions.

I hope I will remember this the next time a post gets on my nerves and also when I really don't know how to ask a question.

I am glad you joined our "family".

[tacks]

Thanks, Gretel.

[tacks]

Update

Father will loan 12k to son at somewhere between 4 and 6% APR. Son will use 12k of proceeds to pay off 12% credit card.

Father will earn more than what money markets are paying. And the son should have a better chance of getting out of debt.

I believe that they will be getting a loan agreement. (And I'm not sure whether i'll even be getting involved in this.)

(Again, 'bail out' was a poor choice of words from me. I don't believe that the Father intends to 'gift' 12k to son. Son has moved in order to reduce his monthly rent expense. Son should be able to make payments to Father.)

[abctax]

Nice

A nice thread here - makes me more comfortable posting my "stupid" questions.
Tacks, don't forget the limit is now $ 13000, if that makes any difference.