What Are the Implications of Giving a Gift Versus a Loan to Family?

What Are the Implications of Giving a Gift Versus a Loan to Family?

Q: What is an intrafamily loan?

A: The IRS defines an intrafamily loan as one family member loaning money to another, which creates a formal creditor-debtor relationship. In this case, the person who loans the money can can you get a title loan on a boat expect to be repaid (typically in interest payments), and they actually enforce the debt. 1

Q: How is a gift different from an intrafamily loan?

A: If a family member gives a relative a gift, whether in the form of cash, stock, business ownership or other types of assets, he or she doesn’t expect to be repaid and there isn’t any kind of consideration, meaning there’s no money or promise to do something in exchange for the gifted amount.

Q: What are the tax and other considerations of gifts and loans?

A: The primary considerations are tax-related, but the reality is that family dynamics and personal opinions about family wealth can also come into play.

From a tax perspective, in 2020, a single individual can gift $15,000 per year to any other individual, including family members, without incurring gift tax implications. A married couple, for example, could gift their son or daughter $30,000 in one year ($15,000 per person) without a triggering gift tax. 2 If individuals and couples make a gift in excess of that amount in a given year, then the amount above the $15,000 per-person exclusion will begin to cut into their lifetime gift tax exemption, set at $11.58 million per single individual (or $23.16 million per married couple) for 2020. 3 After those lifetime exemption amounts have been met, gifts made above those amounts will be subject to a 40% federal gift tax. 3 Given the tax implications of gifts, a loan may be a better option since it doesn’t trigger any kind of gift tax exemption amount and, as a result, can be provided in larger amounts because there is no annual exclusion limit. Continue reading What Are the Implications of Giving a Gift Versus a Loan to Family?