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Question for the Money Doctors

Question submitted on Oct 18, 2012.

Question

I have a potential client that has come into a large estate 15m+. The original estate was established by father who passed 5 yrs ago and now his spouse and potential client''s mother passed in July 2012. There are a series of loans from mother and trust to daughters which are documented as loans and then daughter made loans to husband and his businesses who only had a verbal agreement with daughter. They said the loans were treated as loans, paid interest over the years,but rate is discounted of course and maturity has been extended. Question is there anyway of protecting this loan character of money that the son in law has and not require the estate to recognize it as a gift? Also does the portability character go to the spouse of the estate even if there wasn''t any paperwork done?

Answer

You state that the mother and the trust only made documented loans to the daughters. Those loan balances would be assets that would be included in the mother''s estate. If a daughter then loaned money she had borrowed to her husband in an undocumented loan, that is probably a gift but it doesn''t matter. Transfers between spouses (who are both citizens) are not subject to gift taxes. If the son-in-law had borrowed from the mother with a "loan" that was not documented, that is probably a gift. However, it won''t make much difference. Either the gift from the mother (after the annual exclusion) or the loan balance would be pulled back into the estate and reported on the estate tax return.

Portability refers to the transfer of the unused federal estate tax exemption to the surviving spouse. Since there is no surviving spouse, portability is not relevant.


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