Parents often spend many years supporting their children even past the children’s eighteenth birthday. Even after a child graduates college and starts off on his or her own path in the “real world,” there are times when the parents may want to give the child a little financial help. The nature of this financial gift can come in the form of a loan or as a gift. The difference can be very important.
The best way to make sure that the issue is clear is to write it down on paper what the financial assistance is meant to be. If the money is meant as a loan, the parent and child should draft and sign a promissory note. If the money is meant to be a gift, the parent may want to consider specifically stating this in a will. The reason this becomes important comes in several forms. For one, division of an estate between heirs can become complicated if one child received a large sum of money from the parent before the parent passed away. If the estate is to be divided, for example, as fifty percent to each child, if the money was a loan, then that money should be deducted from the amount of assets the child should receive. On the other hand, if the money was a gift, the child will still receive half the remaining assets of the estate. If the amount of money that the child received before the parent’s death was large, it is obvious how this situation could result in one child receiving a disproportionate amount of a parent’s assets. In the event the parent dies without a will, Minnesota law provides that the money transferred during the parent’s life will only be treated as a loan or advance against an heir’s share of the estate where the parent or the heir stated in writing that was the intention.
Whether the financial assistance was a gift or a loan also matters for tax purposes. There is a $14,000 annual gift tax exclusion under Federal tax laws, which means as long as the amount was a gift under that amount, the parent did not have to file extra paperwork with the IRS. If it was above that amount, however, the parent needs to file a gift tax return. If the amount was a loan, the parent may be required to charge interest on that loan and report that interest as income.
Call us today at 651-413-9568 for a consultation if you have a question about transferring money to family members. We are experienced in these issues and can help you navigate the complicated laws in these areas.