Difficult Gift Tax Question restated

I previously said I loaned my son 100M to start a small construction company and I doubt if he could ever pay back the principal (9yr loan/ AFR). I would like to forgive the loan. Is there any way to accomplish this WITHOUT using my (or my spouses) annual exclusion or without applying it to the lifetime exemption ? I would guess a lot of people havve loaned this kind of money to their children to buy a house and never consider either an AFR note nor a potential gift tax. Thank you Ron CPA

Reply to
Ron
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I can't think of any way to do that.

Well, I can think of one way, though it may not be what you're looking for. What you can do is just let the loan extend indefinitely. Each year your son pays you interest on the loan (or you can forgive it each year, but if you do then one of you will have to pay income tax on the unpaid interest, and it will also use up some of your annual exclusion). Then when you die, you forgive the principal.

Just because they don't get caught doesn't mean they'd get away with it if they were caught.

Reply to
Stuart A. Bronstein

To forgive the principal when you die, that would be a bequest from the estate, right? So, the principal amount is included in the estate, which is in effect applying it to the estate tax exclusion. that seems to still not be what the taxpayer is after. Of course, its got to come from somewhere.

Reply to
Wallace

Maybe convert the loan to stock. If the company isn't making enough of a profit to pay dividends, there's no problem. If the company fails, he doesn't have to repay you or have cancellation of debt income. True, the stock will be in your estate, but the value of a minority holding of stock in a barely-profitable or not-profitable privately-held company is minimal.

Seth

Reply to
Seth

Why not just buy stock in worth 100k?

Reply to
removeps-groups

The question was whether the loan could be somehow forgiven without using either the annual exemption or the lifetime exemption. While gifts in excess of the annual exemption are used to increase the size of the estate for state tax purposes, the estate tax exemption and the gift tax lifetime exemption are not exactly the same.

In fact right now, for people dying this year, the gift tax lifetime exemption is $1 million, while the estate tax exemption is $3.5 million. So it is possible to use up your gift tax exemption and be subject to the tax even if it wouldn't affect your estate tax one way or another.

Reply to
Stuart A. Bronstein

If the company fails, he has a 100k capital loss to balance against his gains, or carryforward 3k each year. If the stock was 1244 stock, the holder can deduct 50k or 100k as ordinary income, as opposed to

3k. The stock can also be a preferred stock that pays dividends (instead of interest), and these dividends would get the 15% treatment after 60 days.
Reply to
removeps-groups

This post is SUBSTANTIALLY different from your original one where you say you are also gifting him $13K annually - this complicates things for you.

Without the annual gifts you could forgive enough of the loan annually to wipe out the principal, but that would also cause a corresponding drop in the interest payments to you.

You'd need to get professional guidance on this, so see a local tax pro first, BUT consider -

1 - converting the loan from a personal loan to your son to a Demand business loan to the company. The company could continue to pay you interest only until you demand the principal. 2 - accept something from your son in exchange for the note - like some percentage of the stock in his company. This could convert your loan into a stock investment, with the attendant issues. Assuming he is organized correctly the company could pay you dividends on the investment which might get YOU better tax treatment than you have now. 3 - Accept some piece of company equipment from your son's company in exchange for the note and lease the item back to his company for a sum equal to your annual interest payment.

These are aggressive maneuvers and should NOT be undertaken without first consulting with a local tax pro who can review the intricacies of your situation and help you determine IF any of these may work for you.

Good luck, Gene E. Utterback, EA, RFC, ABA

Reply to
Gene E. Utterback, EA, RFC, AB

Doesn't this depend on the terms of the loan? With a fixed mortgage, for example, making extra principal payments doesn't lower your monthly payments, but does the reduce the time to pay off your loan.

Reply to
removeps-groups

The payments stay the same, but more of them is principal (which is why it pays off faster), so the interest is less.

Seth

Reply to
Seth

The parties to a loan can agree to change the terms at any time, so that shouldn't be a problem.

The real issue, it seems to me, is that forgiving payments that include interest will cause either the payor (forgiveness of debt income) or the recipient (imputed interest) to be required to recognize taxable income for the interest not paid.

I suppose another way to do it would be to forgive principal in the sum of the annual gift tax exemption, until there's nothing left, and that would eliminate the note as well.

Reply to
Stuart A. Bronstein

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