It is a wonderful thing to be able to use the assets you worked hard for your entire life to improve the situation of your family members or loved ones. It is not uncommon for family members to give each other gifts or make loans when a loved one needs a boost or helping hand. While most people understand that estate planning is the key to a stable future, not all of them understand that there are some common pitfalls to avoid in their estate plan in relation to gifts and loans.
One common estate planning mistake is failing to put loan agreements in writing. Even if you are making a loan to a close, trusted family member, it is essential to reduce your agreement to writing. The reason for this is that if you fail to have a written agreement, it will be difficult or even impossible for your personal representative to collect on the loan after your death. This could mean that there are not enough assets to pay all the debts of the estate, leaving no assets to be distributed to your beneficiaries.
Another very common estate planning mistake is overlooking the potentially crucial estate planning tool of simply gifting assets to your beneficiaries during your life. If you know that you want to leave assets to a particular family member, you may want to consider gifting the asset before your death. The fewer assets remain in your estate at the time of your death, the lower the chance that your estate will be subject to hefty estate taxes. Moreover, you will be sure the recipient will receive the assets, whereas if the assets had to flow through probate, they could be consumed by trying to pay the estate’s debts. There are important tax considerations when making a gift to your family members or friends. There is no Minnesota gift tax, but there is a federal gift tax. In 2018 and 2019, you can give up to $15,000 to as many people that you want without having to report the gift to the IRS, thereby avoiding the gift tax. After 2019, the limit will increase to keep up with inflation. If you exceed the gift tax limit, you will have to pay taxes on that gift.
We have extensive experience helping our clients understand the law regarding gifts, loans, and estate planning. Call us today at 651-413-9568 for a consultation. .