Family Bad Loan- $7,710,742.70

[Sabre]

Mother made numerous documented loans in various sums over a 12 year term. Son never paid back a nickle and Mom did not make any demands. We recently had an attorney file a deficiency judgement. Now family members want me to take this as a bad debt deduction. I have a problem with this: - no demands were made for payment, family member and a sizeable sum.

The son has filed for bankruptcy.

My main concern is that the IRS may consider this a wealth transfer scheme "Substance over Form" and mom could owe large gift taxes since most of the loan were made when the gifting limit was one million.

I realize if i took this loss it would be a short term capital loss. Mom usuallly has anywhere from $75,000 to $125,000 in capital gains each year.

Nickle for your thoughts.

[MilTaxEA]

I would take issue with the fact that she never tried to collect the money. You would think she would put forward *some* effort if it was really a loan.

[MilTaxEA]

Also, out of curiosity, would she then issue her son a 1099-C since the cancelled debt is more than $600?

Edit: Nevermind, according to the 1099-C, individuals are not among the list for entities required to file a 1099-C.

[taxea]

My mom, who has the most generous heart, has made loans to family members, the worst! She writes the amounts and dates down in her records. She handled her brother-in-law's estate. When distributing the funds to the six beneficiary children she deducted the loan amounts that he had doled out over the years and distributed what was left, if any. Some family members are real mooches and feel entitled.
Well mom has loaned to her children, grandchildren, nieces, nephews and Heaven only knows who else. As the trustee of her estate I fully intend to continue this policy and for the ones that are not on her list of beneficiaries I intend to send a demand for immediate payment.

Trust me when it comes to some family members, short of taking them to court, they don't pay. Unlike mom I will go that far if I have to.

Anyhow, I just mention this because I think it is a good way to handle people that feel they are not obligated to repay the loan.

[Burke]

Well mom has loaned to her children, grandchildren, nieces, nephews and Heaven only knows who else. As the trustee of her estate I fully intend to continue this policy and for the ones that are not on her list of beneficiaries I intend to send a demand for immediate payment.Trust me when it comes to some family members, short of taking them to court, they don't pay. Unlike mom I will go that far if I have to.
Anyhow, I just mention this because I think it is a good way to handle people that feel they are not obligated to repay the loan.

Just make sure this policy (reducing the bene share by the amt loaned) is documented in writing in her will. Then you will have no blowback by them and the court will uphold. On the others, hopefully there is a signed agreement between the two parties to pay it back. Otherwise, you will probably be out of luck.

[Kram BergGold]

?

Doesn't the lawyer's action serve as notice that she wants the money. Now you have to determine the corect date as to when it is clear the loan is bad. You said sh ehas proper documentation of the loans. This seems fine to me. It seems when the court rules that
the son has to pay and he does not that is when the loan is bad which may not be till sometime down the road.

[Burke]

My main concern is that the IRS may consider this a wealth transfer scheme "Substance over Form" and mom could owe large gift taxes since most of the loan were made when the gifting limit was one million.

Nickle for your thoughts.

My thought is the same as yours. And the lawyer is probably demanding payment to attempt to lay a basis to categorize them as demand loans and not gifts. Might work, might not. Goes to intent. Interesting. Have you seen the loan documents? Did they specify a schedule of payments? Was payment demanded only after the son declared bankruptcy? Or did this action cause the bankruptcy filing? Keep in mind this might have been planned that way. This sum is too large for IRS to walk away from without a fight.

[taxea]

Just make sure this policy (reducing the bene share by the amt loaned) is documented in writing in her will. Then you will have no blowback by them and the court will uphold. On the others, hopefully there is a signed agreement between the two parties to pay it back. Otherwise, you will probably be out of luck.

She has a trust and although I am trustee she will not provide me with a copy and is very sparse on sharing what is in it. I only want to know because I like to be ready for action when the time comes.
As for whether or not it is written into the trust I plan to ask her to put it writing if that is what she wants done if it isn't in the trust.
I know I have at least one cousin who refused to sign a promissory note and I know that is on Mom. I doubt this person will be getting any part of the estate. The only thing I don't know is whether Mom is going to forgive the debt...in which case I would say a 1099c is in order.