Debt Cancellation To Family Member

[Sabre]

One of my clients loaned her son 2.7 million over about a 25 year period of time. All loans were documented with signed notes. No legal collection proceedings were ever initiated and the son is pretty wothless and insolvent. The estate attorney is worried that these notes could be included in her estate. The son never made a principal or interest payment on any loans.

If she was to write this off as a bad debt i sure would feel more comfortabel if she issued a 1099-C but reading up on the instructions for this form leads me to believe that an individual that is not in the business of making loans cannot send a 1099-C.

Any input from the group would be helpful.

Thanks

[BOB W]

One of my clients loaned her son 2.7 million over about a 25 year period of time. All loans were documented with signed notes. No legal collection proceedings were ever initiated and the son is pretty wothless and insolvent. The estate attorney is worried that these notes could be included in her estate. The son never made a principal or interest payment on any loans.

If she was to write this off as a bad debt i sure would feel more comfortabel if she issued a 1099-C but reading up on the instructions for this form leads me to believe that an individual that is not in the business of making loans cannot send a 1099-C.

Any input from the group would be helpful.

Thanks

2.7 Mil....Wow. I don't think Mom ever intended it to be repaid and the notes were just to make the son aware that money doesn't grow on trees. If the amount was $25,000 most would say forget it. 2.7 Mil ?, Mom never wanted it back and gift tax return should of been filed. Mom is guilty of not filing Gift Tax Returns.

What do you think?

[taxmandan]

Agree with Bob, with no effort to try and collect on the loans, then this is gifting and gift tax return(s) should have been filed in any year when the amount exceeded the threshold. It will count against her estate. Did the notes have a repayment schedule or interest? If not, they aren't going to hold up in audit, if so, why was no action taken to collect?

And 1099C is only for businesses that make loans in the course of business.

[Burke]

. The estate attorney is worried that these notes could be included in her estate. The son never made a principal or interest payment on any loans.
Thanks

He is exactly right. They will be included in the estate. She can begin forgiving the balance up to the exclusion amount each year, but at that rate, it will take her 207 years. She might go back to the beginning and determine the exclusion amount for each of the last 25 years, but I have no idea if that will fly.

[ChEAr$]

Hmmm. I wonder. Is dear old mom married?

[Burke]

Unified credit could be applied. But if she can afford to give away $2.7 million, she may need it for other assets, unless she happens to expire this year. Estate exclusion is going back to $1.3 million next year.

[Jiggers]

!!!!!!!!!!!!!!!!!!!!!!!!

Hmmm. I wonder. Is dear old mom married?

Harlan!

But, not a bad thought!

[Burke]

Seriously now, OP did not mention whether she was married. But that would also make a difference in the exclusion amount.

[Snaggletooth]

Judging Intentions

2.7 Mil....Wow. I don't think Mom ever intended it to be repaid and the notes were just to make the son aware that money doesn't grow on trees. If the amount was $25,000 most would say forget it. 2.7 Mil ?, Mom never wanted it back and gift tax return should of been filed. Mom is guilty of not filing Gift Tax Returns.

What do you think?

It's tough to judge intentions. However, I do think the reason these loans were documented were to avoid gift tax. I think IRS would have to take this position. Another factor that hasn't been brought up yet is whether there are other children or beneficiaries, and whether sufficent wealth exists for accession to them.

If the $2.7M is added back to the estate, and divided appropriately among heirs, and there is enough to accommodate withdrawing the $2.7M from the son's share, then I don't think anyone can make a case for "lack of economic substance."

Example: 2 other heirs, distributable amounts available: $6.3MM. Adding back the $2.7M brings the total to $9.0M divided three ways. This gives the son in question a net settlement of $300,000 and he has repaid the loan. No problem.

The only thing not addressed in any of the above would be the matter of imputed interest, and I do believe that would be a significant tax factor.

[Sabre]

Son's debt

Thanks for all the responses- Mom is not married but even with her substantial net worth I would still call her a candidate for a brown bag- also did I mention she is a TEA bagger and heavy into the Fair Tax.

The estate attorney wants me to comment on my client - Mom's tax situation- and her son who is not a client. If a person writes off of a debt to a realtive and no 1099-C is allowed to be prepared who is to say the debtor reports the income form cancellation. I thought the son might be able to claim insolvency but the father set up a trust so that the son gets about 250 large out of each year so i think that's out the window.

Good old mom had already filed gift tax returns and paid tax so every penny of thsi will be subject to gift tax if that is the chasen course of action.

It is interesting that I had worked for this woman for 12 years and never once did she mention the loan to her son. According to the estate attorney she is worried about her actions effecting her son.

[taxea]

I would suggest the atty get his "comment" from a tax atty or the IRS.

[JohnH]

I agree. This could be a $5,000 comment or a $50,000 comment, depending upon whether we're talking about the research fee or the lawsuit settlement (if the "comment" happens to be wrong).