To Gift or Not to Gift?

By Robert Dowling, CFP®

Wealth Manager, Principal

November 11, 2019

Like many parents with adolescent or grown children, you may want to give them a financial jumpstart on their lives. You might help them to get their first car. Pay for their college or grad school tuition. Get them a foot in the door of their first home by contributing toward the down payment. Give them seed money to start a business.

If you can easily afford to help your child without affecting your own future wellbeing, you may want to make a financial gift with no strings attached. Keep in mind however, there are limitations regarding how much can be gifted to someone without incurring a gift tax, which is the obligation of the giver.

According to the Internal Revenue Service, while any gift has the potential to be considered a taxable gift, there are many exceptions to this rule. For example, the following are not considered taxable gifts:

Gifts that are within the annual exclusion for the calendar year. (For the 2019 tax year, the exclusion amount is $15,000 per donor.)

Tuition or medical expenses you pay for someone (educational and medical exclusions)

Gifts to your spouse

Gifts to a political organization for its use

But, Giving a Gift Isn’t Always the Best Option.

If giving a gift to your child could compromise your own financial wellbeing or future, then don’t do it. We often say at Modera: you won’t be able to take out a loan for retirement. In addition, gifting on a regular basis may prevent some adult children from learning to live within their means or to appreciate the value of the gift.

However, another option to consider is an intra-family loan. This formal agreement, when structured properly, can offer significant advantage to you and to your children.

Some of the Benefits of Intra-Family Loans

Intra-family loans can allow you to collect a higher rate of interest than you might get from a bank deposit, while simultaneously allowing your borrower to pay less interest than a bank loan. There are certain restrictions on interest rates for intra-family loans, which your Modera advisor can explain. As a lender you will also need to report interest payments made to you, as these are taxable.

Unlike a commercial loan where the interest payments go to the outside lender, with an intra-family loan, the money, including the interest, stays within your family.

The borrower may be able to deduct interest payments on their tax return if the loan is structured appropriately.

An intra-family loan can serve as a way for you to provide financial support without affecting your gift or estate tax exemptions.

If a family member hasn’t yet established a positive credit history, an intra-family loan can allow them to borrow at a favorable rate.

A formal intra-family loan creates a sense of responsibility for repayment.

There may also be gifting opportunities within the intra-family loan, which will allow you to take advantage of the annual exclusion. For example, you can loan more money up front, then, in subsequent years, gift portions of the principal to the borrower.

Structuring an Intra-Family Loan

In order to avoid issues with the IRS, an intra-family loan should be properly structured and documented. It’s likely you will require outside assistance from a CPA and a tax attorney to ensure its legality.

There must be evidence that the borrower intends to and is able to repay the loan according to the agreed- upon schedule.

The interest rate should be at or above the applicable federal rate (AFR).

It may feel strange to have to sign a formal loan agreement with a family member but, keep in mind, this documentation could protect you if the IRS were to argue that the loan was in fact a gift. If the IRS deems the transaction a gift, the lender/donor may need to use his or her gift tax exemption or pay gift taxes.

If, at any point, the loan is forgiven, the IRS may treat it as a gift and subject it to gift tax.

Intra-family loans are one of many techniques that can help achieve your and your family’s financial goals. As with any strategy, you and your trusted financial advisors should evaluate it within the context of your overall financial plan. Your advisors can help you structure the loan and document it properly so that your children can enjoy the full benefits of your intra-family loan while you support your long-term estate planning goals.

At Modera, we focus on helping our clients manage their entire financial lives, taking into consideration their family situations. To learn more about intra-family loans and financial gifts, please contact us.

Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.

For additional information about Modera, including its registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.

Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.

Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.

Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.