Why Your Estate Planner Needs to Know If You’ve Lent Money to Family

Many children and grandchildren are skipping the traditional bank and obtaining loans from parents or grandparents.  Unfortunately, we have all heard stories of families torn apart because of disagreements over money. So, what can you do to make sure your intra-family loans help — rather than hurt — your family?

As far as estate planning is concerned, money you lend to others is legally an asset. If you have lent money to a family member the presence of these assets in your estate can be problematic for your surviving family members. This is because your executor and successor trustee are under a legal requirement, known as fiduciary care, to collect the outstanding obligation, even if the other party is a family member.

If the amount of money that you have lent out is significant — and “significant” can be relative — it is important to let us know as we help you plan your estate. For example, if you wish to forgive the debt there are special terms that must be included in your trust or will for this to happen. On the other hand, you may want the debt to be paid out of the inheritance the borrower is otherwise receiving. In that case, the payment of the debt from the inheritance must be addressed in your estate planning documents.

A Brief Loan Primer

A loan is a legal and financial arrangement where money is borrowed and is expected to be paid back with interest. Generally, a loan involves a promissory note, which is a signed document by the borrower containing a written promise to repay a stated sum of money to the lender in accordance with a schedule, at a specified date, or on demand. In some cases collateral, like real estate or other property, is used to secure the loan. Collateral is something pledged as security for repayment of the loan. If the borrower quits making payments, then the collateral can be taken by the lender.

Lending as an Estate Planning Tool

When properly structured and well documented, loans can be a smart estate planning tool for many families. This is because lenders (usually grandparents or parents) can essentially give access to an inheritance without any immediate gift or estate tax problems, generate a better return on their cash than they could with bank deposits, and borrowers (usually children or grandchildren) can take out loans at interest rates lower than commercial rates and with better terms. In fact, the Internal Revenue Service allows borrowers who are related to one another to pay very low rates on intra-family loans. Furthermore, the total interest paid on these types of transactions over the life of the loan stays within the family. If structured and documented properly, intra-family loans may effectively transfer money within the family, for the purchase of a home, the financing of a business, or any other purpose.

Sometimes loans can be used in sophisticated estate tax planning strategies as a way to shift assets into special estate-tax saving trusts. One variant of this technique is sometimes called an installment sale to a grantor trust. Although this sophisticated strategy and others like it are usually only appropriate for those with a net worth of at least a few million dollars, other types of intra-family loans, perhaps for home improvement, an automobile purchase, or a business, can help families across the wealth spectrum.

There are several points to keep in mind regarding these types of loans: the loan must be well-documented, lenders should usually ask for collateral, the lender should make sure the borrower can repay the loan, and the income and estate tax implications should be examined thoroughly.

Deciding What You Want

While you were kind enough to help a member of your family by lending him or her money, do not let this become a legal dilemma in the event of your incapacity or after your death. Instead, use your estate plan to specifically express what you want to have happen regarding these assets. Before lending money, it is important to carefully consider how the loan should be structured, documented, and repaid. If you or someone you know has lent money and has questions about how this affects your estate plan, contact us today to discuss the options.

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Debt After Death: Why You Should Think About It When Estate Planning

If you carry debt, do not assume that your death or incapacity will make it automatically disappear. To the contrary, the money you owe may eat away at the assets you were planning to leave to your heirs or — if you owe a large amount of money — may wipe out your estate completely. Debt comes in many different forms including credit cards, student loans, car payments, mortgages, and other financial obligations.

Not Just About Assets

Estate planning lets you name people you trust to manage your affairs if you’re unable to do so and lets you indicate who will receive your property upon your death. While estate planning typically focuses on ensuring your assets will be distributed to your intended beneficiaries upon your death, the collective purpose behind financial and estate planning is to ensure that you’re building the largest nest egg possible and then protecting your family and loved ones in the event of your death or incapacity. For this reason, knowing what your debts are and implementing the proper estate planning will allow you to ensure those you leave behind are not left drowning financially. You will also be able to rest easy knowing what you’ve built will go to those you want, rather than to the creditors.

There are two types of debts: secured and unsecured. Secured debt is a loan that has been guaranteed by some form of collateral. If a borrower defaults on a secured loan, the lender can recover the collateral. House and car loans are the most common forms of secured debt.  Unsecured debt, on the other hand, does not involve collateral. If the borrower defaults on an unsecured loan, the lender typically needs a court order to recover a judgment against the borrower or the borrower’s estate. The most common type of unsecured debt is a credit card account, although other common unsecured debts include most tax debt, personal or signature loans, student loans, or payday loans.

While some debt, like many federal student loans, goes away upon your death, others do not — like mortgages and home equity loans — leaving your family potentially on the hook. Secured debts essentially become the responsibility of the deceased’s estate because if the payments stop then the bank can retake the collateral. If you have a will-based estate plan, the process of paying off debts and distributing whatever assets are left over (if any) is a court process known as probate. If you are using a trust, then your successor trustee will follow a similar process, but it won’t necessarily involve a court.

Benefits of Estate Planning

Creditors are typically barred from going after retirement accounts or life insurance benefits because these often go to the named beneficiary, escaping the probate process. But, if the named beneficiaries are no longer living, the death benefit may go to your estate making it subject to creditors. Naming proper beneficiaries is key when protecting these larger assets from creditors after your death.

A comprehensive estate plan that includes an up-to-date will or trust and beneficiary designations can protect your family against the impact your debt may have on your estate. A little bit of planning can go a long way in ensuring your family and loved ones are protected in the event of a tragedy.

Of course, joint account holders and co-signers are held fully responsible for the entire debt even if all the charges were only made by one borrower. If you have loans that family members have co-signed for, let us know so we can develop a strategy to ensure your death doesn’t create a financial burden for them. Even for other debts, some creditors may try to collect from your family. For this reason, it’s always best to make sure your family knows you have a plan and knows to turn to us for help if you become incapacitated or upon your death.

Contact a Professional

While the tools typically used in estate planning may appear to be interchangeable, the planning process and the resulting documents, like a will, trust, and power of attorney, are as unique as the person. Working with us, as your knowledgeable estate planning attorney, can make it easier to address your needs and reduce the impact of your debt on your loved ones.

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High Deductible Health Plan? How Your Health Savings Account (HSA) Works with Your Estate Plan

If you’re enrolled in a qualified high-deductible health plan (HDHP), you must consider how your health savings account (HSA) fits into your estate plan—especially to make sure that any hard-earned money left in your HSA when you die goes where you want it.

What is an HSA?

An HSA is an account whose funds may be used to pay for qualified medical expenses or saved for expenses that arise in the future. These accounts have several tax advantages. You can deduct contributions to the account up to the yearly limit. You pay no income taxes on earnings in the account (such as interest or dividends). And, withdrawals from the account to pay for qualified medical expenses are tax-free. An HSA is an option for any one enrolled in a qualified HDHP. Your insurer will be able to tell you if you have a qualified HDHP.

Unused HSA funds may be carried over into the following year, which is in sharp contrast to a flexible spending account (FSA), whose funds are considered “use it or lose it,” because you can only carry over up to $500 from one year to the next, as long as your plan allows for the carry over.

An HSA functions as a bank account plus investment account fusion while you’re alive but gets treated more like a retirement account at your death—and this dichotomy makes strategic estate planning that considers all tax ramifications crucial.

Estate Planning with HSAs

How you approach estate planning with your HSA depends largely on your account goals. There are two broad categories of people with HSAs. They are:

(1) Accumulators may use HSA funds for medical expenses, but their overriding intention is to build up a balance year after year and use the HSA as a supplement to retirement funds.

(2) Spenders use HSA funds to pay for qualified medical expenses tax free and their overriding intention is to save income taxes each year by running their qualified medical spending through the account.

Both accumulators and spenders should be concerned with directing where HSA funds should go after death, but contacting an estate planner is an immediate must for accumulators because of the potentially large sums of money and tax issues involved. Without a plan in place, your HSA balance may pass to your heirs through probate, the court-supervised process of distributing a deceased person’s estate. Probate can take several months and add extra expenses for your estate on top of the income tax bill.

The easiest way to avoid probate for your HSA is to designate a beneficiary to receive the funds upon your death. Many people name a spouse as a beneficiary. A surviving spouse who receives an HSA can continue to treat the funds as an HSA, allowing the spouse to continue to defer taxes and use the money for qualified health expenses.

You may also choose to name a non-spouse beneficiary, perhaps because you are unmarried or have children from a previous marriage. For non-spouse beneficiaries, the account will cease being an HSA upon your death, the HSA fair market value becomes taxable income to the beneficiary in the year of your death, and the account balance (less income taxes) is distributed to your named beneficiaries.

Another option is to name a trust as the beneficiary of your account. This can be a particularly good option if you would like to leave the funds to a minor. If you leave the account to a trust, the HSA amount becomes taxable income on your final income tax return, and funds pass to the trust for the benefit of the beneficiary. For minor beneficiaries, this avoids costly guardianship proceedings for the minor’s inheritance. For other beneficiaries, a trust may offer better asset protection, divorce protection, and privacy than leaving the account outright.

Your family can pay your medical bills out of the account within a year of the death. Depending on your other assets, paying final medical bills out of the HSA can result in significant savings. If a loved one has passed away and had an HSA, it’s always a good idea to obtain a professional opinion before paying the deceased’s medical bills.

Overall, HSAs can be extremely useful tools in retirement, tax planning, and estate planning, but the tax rules surrounding them are complex. To maximize your benefits and do what’s best for you and your loved ones, call our offices for a consultation today.

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Organizing for Tax (and Estate Planning) Season


It’s the start of a new year, which means tax season—and this year’s April 17th IRS filing deadline—is just around the corner. Soon you’ll be receiving tax forms such as your W-2 or 1099s, and you’ll start thinking about the life events that could affect your taxes in various ways.


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