Q. My primary asset is my home, which I purchased about 40 years ago and now own free and clear. I would like to leave it to my children, but in a way that avoids the fuss of a probate or trust administration when I die. Is there some way to do this?

A.  Yes, indeed. You might consider leaving it to your children via a Life Estate Deed. A Life Estate Deed (“LED”) is a special kind of deed which you would sign and record now, but which would transfer your home to your children effective upon your death, while reserving to you the exclusive right to live in your home during your lifetime. Upon your death, your children’s interest would mature into a full ownership interest

One of the nice features of this LED, is that the clearing of title upon your demise is very simple.  At that time, your children need only file with the county recorder an affidavit reciting the fact of your death, along with a certified copy of your Death Certificate and other routine transfer documents.  There is no probate and no trust administration to deal with.

However, as with many legal matters, there are “Pros” and “Cons” to using this special deed. Here are some of them:

Advantages:

1) Upon your demise, clearing title and confirming ownership in your children is a simple procedure, handled without probate or trust administration.

2) The home would receive the same favorable tax treatment accorded a transfer, upon death, via a Living Trust or Will: Your children would receive the home with a tax basis equal to its increased value at your death, thus minimizing any capital gain tax if they later sell the home.

3) Should you ever apply for a Medi-Cal Long Term Care subsidy to help with nursing home expense, the home would be protected from a post-mortem recovery claim for reimbursement.

4) In terms of title insurance, this LED is better than the new Transfer on Death (TOD) Deed, as many title companies are unwilling to insure the transfer of title where the newer, TOD Deed has been used.

Disadvantages:

1) Once the deed is signed and conveyed, you cannot change your mind by revoking the conveyance.

2) Once the deed is executed, you would not be able to obtain a conventional or reverse mortgage secured by the home.

3) Once done, you could not sell the home without agreement of your children, and if sold, the proceeds must be “split”.  This restriction could impair your ability to sell the home to help fund your own retirement or long term care expenses.

4) Disputes may arise regarding responsibility for repairs or improvements.

5) If any of your children predecease you, their interest would go as they direct in their own trust or will or, if none, to their heirs-at-law. Thus, you would no longer control the ultimate disposition of their interest.

While many of these disadvantages can be eliminated by creating a formal “Living Trust”, the trade-off is the greater expense of creating a trust, and the time and expense of a formal, post-mortem trust administration upon your demise.

Before making the decision to use a LED — rather than a “Living Trust” or Will–  it would be wise to seek professional advice from a knowledgeable attorney to make sure that this special deed is right for you.

Q.  My wife and I have about $10,000 in credit card debt that we struggle to pay each month. Our incomes are very modest and all from Social Security and my work Pension. Is there any way that we can legally avoid paying this debt without dire consequences?

A.  Very likely, yes. Generally speaking, income from Social Security, work pensions, VA Benefits and disability income is protected, by federal law, from collection by non-governmental creditors. If these are your sources of income, you could very well just stop paying and you would still receive your full incomes each month. Indeed, it is not a crime to stop paying a bill, especially if continuing to pay would deprive you of the basic necessities of life. Many seniors are both surprised, and relieved, to learn of this.

Although your creditors may be aware that these source of income are exempt from collection, some may nevertheless attempt, by repeated phone calls, to coerce you into paying these uncollectible bills.  You can easily put a stop to this. Under the federal “Fair Debt Collection Practices Act”, you may send a letter to your creditors demanding that they cease all further efforts to communicate with you by mail or phone. The creditors must then immediately cease all further communication. Such letters should be sent Certified, Return Receipt Requested, so you have proof of mailing. The creditor then has the option of writing off the debt as uncollectible, or filing a lawsuit to obtain a judgment. Unless the debt is large, many creditors just write off the debt and close their file.

What if one of your creditors opts to file a lawsuit and obtain a judgment? Answer: They still will not be able to go after your income if it is from one of the sources mentioned above. True, if you own a home, they could obtain a judgment and record a lien against your home. But, even then, that is usually not as bad as it sounds: attempting to collect a judgment by foreclosing on an individual’s home is a cumbersome and expensive process, and most creditors would prefer to just record the judgment and then let it just sit there, accruing interest, to be paid out of escrow only when you someday sell or transfer your home or borrow against it.

There are some exceptions to the above: if you owe money for unpaid taxes or other obligations to federal agencies, such as unpaid student loans, they may garnish up to 15% of your social security income. But, even here, there are options  to avoid collection, upon a proper showing that you need all of your income for your basic necessities.  Another exception is unpaid child or spousal support.

Before deciding upon the best plan in your case, it would be wise to seek legal advice.  To aid you, there is a very low cost resource available to low income seniors and the disabled. It is a non-profit law firm called ‘Help Eliminate Legal Problems for Seniors’ (“HELPS”).  For a very nominal monthly fee, based on a sliding income scale (which can be as low as $5/month, or even for free), they will counsel you, call creditors on your behalf, and help you write “Cease and Desist Letters”. You may contact them for assistance on line at www.HelpsIsHere.org or by calling 1-855-435-7787.

Q. My sister just passed away and had previously appointed me as trustee of her trust. She was estranged from one of her sons and left him nothing on purpose. However, I anticipate that he will demand a copy of the trust and information about her estate. Am I my legally obliged to share any of that information with him?

A. Here are the short answers: Yes, on a copy of the trust; No, on information about the estate. Here’s the explanation:

Copy of the Trust:  California law provides that, upon the demise of a trust-maker (aka, a “Settlor”), formal notice must go out to all of the Settlor’s beneficiaries AND heirs at law. Beneficiaries are persons or organizations named in the trust to receive a bequest; they may, or may not, also be family members.  Heirs are close family members whose status is measured by bloodlines and who may, or may not, also be named as beneficiaries. This formal notice advises both named beneficiaries and unnamed heirs that they are entitled to a copy of the trust and that, if they wish to challenge its legal validity, they must do so within a prescribed period of time.

The law’s rationale appears to be the following:  heirs, who may have been left out entirely, as in your sister’s case, or who may feel that they were “short-changed” on their anticipated inheritance, should have the right to challenge the trust by, for example, proving to a judge that your sister was of unsound mind when she signed the document.   To challenge the trust, the law understandably affords them an opportunity to obtain a copy of the trust instrument upon formal request.

Information About the Trust Estate: By comparison, however, only a beneficiary is entitled to information about the trust estate, including an accounting of the trust assets, income and expenditures.  In this sense, beneficiaries would include both primary beneficiaries and contingent beneficiaries, the latter being persons who would take in the event that the primary beneficiaries predeceased them or disclaimed their bequests.

Other Options:  Sometimes clients with estranged family members balk at having to formally notify them of the commencement of formal trust administration following a settlor’s death. These families are concerned that the estranged heirs may make trouble, especially when offered the right to a copy of the decedent’s trust.

Unfortunately, if the decedent’s assets are held in a trust, there is really no way around the formal notice requirement required by California law.  However, if we are consulted in advance, say, at the time the Settlor is designing his or her estate plan, there are sometimes alternative arrangements that can avoid the necessity of formal notice. One option:  Instead of placing assets in a Living Trust, many kinds of assets can be held in Beneficiary Form, so that the particular asset goes automatically to the designated beneficiaries upon the owner’s death and without probate or formal trust administration. Examples: Pay on Death (“POD”) Bank Accounts, Transfer on Death (“TOD”) Brokerage Accounts, Insurance and Annuity Policies and even Transfer on Death Home Deeds.

In connection with trust administration, especially where — as here — you expect difficulty from a disgruntled heir, it is wise to engage the services of an attorney familiar with trust administration to guide you.

Q.  Our 35 year old daughter is going through a divorce. She is on disability and gets SSI and Medi-Cal. We worry that she may lose her benefits once she is awarded support and receives her share of community property. You recently wrote about a Special Needs Trust to protect benefits for a senior in a nursing home. Might that trust also be used in her situation to protect her benefits?

A. Yes, indeed, and my compliments for asking the question. Very few attorneys and judges are familiar with the use of the Special Needs Trusts (“SNT”) in the divorce context. As a result, the sad fact is that many persons on SSI and/or Medi-Cal lose their benefits when they divorce.  A bit of background:

To qualify for Supplemental Security Income (“SSI”), an individual with a disability must meet two conditions:  She must (a) have less than $2,000 in non-exempt resources (e.g. savings), and (b) her monthly income must be less than the SSI benefit rate, currently $895.72 (in 2017).  An award of SSI also entitles the beneficiary to Medi-Cal.

In the divorce context, a spouse would typically be awarded both spousal support and a division of marital assets, such as bank accounts, IRA’s, etc.  If that spouse were receiving SSI and/or Medi-Cal, the award of support and/or marital assets  could render that spouse ineligible for public benefits if they put her over the respective income or resource ceilings. The question, then, is whether there is a way to preserve BOTH a spouse’s public benefits AND her right to support and share of marital assets?

Answer:  YES. Enter the Special Needs Trust.  If handled with proper care, the SNT could hold both court-ordered support and resources, thus preserving for the spouse with a disability both her public benefits and the divorce award, and thereby helping to make her life post-divorce a bit easier.

Once inside the SNT, the Trustee would handle the funds in a manner compliant with the SSI and Medi-Cal rules. This typically would mean that the Trustee would not disburse funds directly to your daughter, herself, but instead would pay third party providers, selected by her, directly for goods and services that she needed, such as a car, computer, clothing, etc. A good trustee would comply with your daughter’s requests for payment to her selected providers, so long as those payments did not undermine her ongoing eligibility for the public benefit programs. The trustee would also typically make periodic reports to the government programs to affirm compliance with the program rules.

If mentally competent, your daughter could create her own SNT and even select her own Trustee, who might be a parent or trusted friend. Alternatively, she could join a Pooled SNT established by a non-profit organization, which would provide professional trustee services for a reasonable fee.

To make this option work, it is essential that your daughter engage an Elder Law or Special Needs attorney familiar with the use of the SNT in divorce. The SNT attorney would then work with her divorce attorney and might help educate the judge and opposing counsel to the benefits of this technique. It is also best that the SNT attorney be engaged early in the case.

ReferencesSI 01120.201(J)(1)(d) [“.unless the assignment is irrevocable.”]; SI 01120.200(G)1)(d) [“..as a result of a court order…”]; SNT Fairness Act

Q.  My wife suffers from Parkinson’s and has been in a nursing home for some time. About a year ago, we put everything in my name so she could qualify for a Medi-Cal subsidy to help pay for her care. We currently have only simple wills which leave everything to the survivor of us, and then to our two children. Is this the best plan?

A.  Probably not, and here’s why: if for some reason you predeceased her, then all of your assets would go to her. These assets would then put her over the $2,000 Medi-Cal resource ceiling for an unmarried individual, and she would be terminated from the program. She would then have to use these very assets to pay for her care, potentially depleting a lifetime of savings and leaving little or nothing as an inheritance for your children.

A better plan would be to change your own will and trust so that if you predeceased her, your assets would go into a Spousal Special Needs Trust (“S-SNT”) for her benefit. The S-SNT is a special trust which would hold these assets in the name of a “friendly” trustee, who would use them to pay for extra things for your wife not provided by Medi-Cal, such as a TV in her room, occasional outings, and perhaps companion visits. Because the assets would be owned by the trustee, they would not count as hers and would thus not undermine her continued eligibility for Medi-Cal. One of your children could serve as trustee.

Upon her later demise, the balance remaining would go to your children or other designated beneficiaries.

This spousal S-SNT requires that your plan be structured in a very special way. Because of a quirk in the law, it must be created by Will, and not by trust. In this sense the S-SNT created for a spouse is very different from the Special Needs Trust sometimes created for a child or grandchild on public benefits.

Your plan could still use a trust and companion will. They would be structured so they worked together but contained a kind of “toggle switch”:  If your wife predeceased you, then upon your own later demise they would pass everything to your children by trust.  But, if your wife survived you, the “switch” would trigger and trust assets would, instead, transfer to the Will to create the S-SNT for her.

Because the S-SNT for a spouse must be created by will, it requires some involvement by the probate court after your demise. Fortunately, this requirement does not necessarily mean that your estate would need to go through a full probate. It only requires that, after your demise, a petition be filed in the probate court seeking an order formally establishing the S-SNT and authorizing its funding from your probate estate. Once the order is granted, your estate assets would be so transferred, and the probate could then be closed.

This plan does require that it be in place before your demise and its design and implementation does require special skill.  I recommend that you seek out a knowledgeable Elder Law or Special Needs attorney to assist you in creating it.

Note:  A variation of this plan would be suitable for a couple, presently in good health, who wish to plan for the possible future long term care needs of the survivor of them.

Reference:  42 USC 1396p (d)(2)(A) [“Treatment of Trusts”]. Note the phrase “established … other than by will”.

Q.  A while back you wrote an article advising that the obligation to repay Medi-Cal for benefits received during life changed as of January 1, 2017. Does that mean that we no longer need to include Medi-Cal planning powers in our estate planning documents.

A. Not at all. While the rules requiring “payback” to Medi-Cal have changed dramatically for persons dying after January 1, 2017, (making only estates that go through probate subject to recovery), there is still a need to plan ahead for Medi-Cal eligibility and those rules have not changed.

Background:  Elders in need of nursing home care face costs of $9,000 per month or more, and risk running through a lifetime of savings to finance that care. Fortunately, the Medi-Cal program offers a safety net, helping those who qualify avoid financial ruin.  However, Medi-Cal has strict resource caps to qualify:  $122,900 in non-exempt assets for a married person, and only $2,000 for an unmarried person.

Persons over the resource caps must either shoulder the entire financial burden themselves until they “spend down” to the caps, or engage in proactive Medi-Cal planning to bring themselves under these caps. However, to engage in this planning the applicant must either have full mental capacity at time of need, or have legal documents in place — with special provisions — so others can do so for him. Consider these examples:

(1) Mary: Married Person: $300,000 in Cash Assets: In this case, Mary and her spouse are over the Medi-Cal resource cap by $177,100, and Mary would not qualify for a Medi-Cal subsidy. However, there may be lawful strategies that could be used to bring the couple’s assets down below the resource caps. Examples: give away the excess to children, albeit in a very special, Medi-Cal compliant manner; use the excess funds to purchase a very special kind of annuity; or, convert excess cash assets into exempt assets, such as by paying down a home mortgage. However, if Mary is incapacitated, she may be unable to join in these actions, unless special powers were included in her Power of Attorney and/or Trust authorizing others to do so for her.

(2) John: Single Person: Home Sale Contemplated:  Let’s suppose John cannot live safely at home. His family anticipates the need to sell his home, worth $750,000, to finance care in an Assisted Living Facility (“ALF”) on a private pay basis, as Medi-Cal usually does not subsidize care in an ALF, but only in a nursing home (“NH”).

If John’s care needs later increase to the point where he needs nursing home care, the sale proceeds still in his name would then likely place him over the Medi-Cal resource cap and render him ineligible for a Medi-Cal NH subsidy.   A better plan:  if a special “Medi-Cal Asset Protection Trust” (“MAPT”) were first created to hold title to the home, and title to the home were placed into this trust before sale, then the sale proceeds would not go to John, but rather to his Trustee. The Trustee could then use them for John’s care in the ALF. When he later needed a Medi-Cal NH subsidy, the remaining proceeds would not be treated as owned by John.  He might then qualify for a Medi-Cal NH subsidy if his other resources were below the cap, and thereby preserve his remaining estate for family. However, if John lacked capacity at this time of need, this planning option may not be available to him, unless he had advance planning documents in place — with special planning powers — so as to permit others to create the MAPT for him.

In sum, it is still wise to include special Medi-Cal planning powers in your estate planning documents, for possible future need.

 

Q.  I am a frequent user of Facebook and Twitter, and I sometimes wonder what would happen to my accounts upon my death. Would my family be able to access my posts?

A. Under a new California law that went into effect January 1, 2017, the answer is “yes”, provided that you take proactive steps during your lifetime to authorize access after your death. The new law is called the Revised Uniform Fiduciary Access to Digital Assets Act (“Act”) or AB 691. Previously, California law was silent on the right of family members to access such records after the owner’s death.

Under the new law, there are essentially four ways in which you may give a person you trust (your “fiduciary”) access to your social media accounts after your demise. The “Act” calls these “digital assets”.

1)  Use On Line Tool:  You may give consent in the “Online Tool” set up by the custodian, such as Facebook or Twitter, in response to the new law. The consent you provide in this tool overrides anything to the contrary in the custodian’s “terms of service”, or any contrary intention in your will or other legal document;

2)  Grant Authority In A Legal Document:  Under the new law, you may grant access in your Last Will, Power of Attorney, Trust, or other legal document.  However, this authorization must specifically grant the right to access your digital assets; a general grant of authority to deal with your estate may not be sufficient.

3) Terms of Service Agreement: If you have failed to grant access by using the  custodian’s “Online Tool”, nor given specific authority in your Last Will or other legal document, then the custodian’s Terms of Service (“TOS”) would control, and the TOS may or may not grant authority to access records of your digital communications after your death.

4) Court Order: Finally, unless you have specifically objected to the release in the Online Tool or in your Will or other legal document, your executor might apply for a court order, provided that he or she can show that disclosure is reasonably necessary for estate administration.

So, if you would like others to have access to your digital assets after your death, the two best ways to do this are as follows: (a) go to the custodian’s website,  locate the “online tool” established pursuant to this legislation and specifically consent to disclosure to your executor, successor trustee, or other designated loved ones after your death; and/or (b) specifically authorize disclosure in your Last Will, Power Of Attorney, Trust or other legal document.

If you have already prepared your estate planning documents, you might consider the creation of a stand-alone Power Of Attorney for Digital Assets.  Note: normally, a power of attorney expires upon the death of the maker. However, under this legislation, a consent in a power of attorney to access digital assets would apparently still be valid, for that limited purpose, after the death of the maker.

There are some shortcomings in the new law, namely: (1) it does not authorize access upon the owner’s incapacity, but only after the owner’s death; and (2) it does not appear to authorize access to financial accounts, such as bank or brokerage accounts, but only to social media and email accounts.  Still, if you desire to provide access to your social medical digital assets after your demise, you may now do so, provided that you take proactive steps as outlined above.

References: Revised Uniform FIduciary Access to Digital Assets Act (AB 691)

Q.  My wife and I are covered by a Medicare Advantage Plan, but we often find that doctors listed in our plan’s directory turn out not be in the Plan. This makes it difficult for us to rely upon the list to seek care from doctors in the network. Any comment upon this?

A.  Yes, and you are not alone. As you know, Medicare Advantage plans are a popular alternative to regular Medicare because the MA plans typically offer lower out-of-pocket costs and the same basic coverage as original Medicare, plus some additional benefits and services that original Medicare doesn’t offer. However, seniors need to make sure they know how their plans work

Medicare Advantage plans rely upon members seeking care from In-Network providers and they typically have different coverage rules for out-of-network care. It is therefore important to know which doctors and hospitals are in a plan’s network when you seek care. Reliance solely upon your plan’s provider directory could lead to surprises and unexpected medical bills.

A recent government review of Medicare Advantage plans revealed that their provider directories were often riddled with errors. The most egregious errors were the frequent identification of doctors as being in the Plan Network, who actually were not. In this regard, the Centers for Medicare & Medicaid Services (CMS) conducted a review of online provider directories for Medicare Advantage plans.  It found that there was incorrect information for half of the 5,832 doctors listed in the directories of 54 Medicare Advantage plans, together representing a third of all Medicare Advantage providers and covering approximately 17 million Americans.

As a result of that review, CMS warned 21 Medicare Advantage insurers to fix the errors by February 6, 2017, or face serious fines.

Before purchasing a Medicare Advantage plan, you should double check with the doctors and hospitals you use in order to verify that they are part of your Plan’s provider network. Once you are enrolled, and before you arrange for care from a new medical provider listed in your directory, you should first call the provider’s office and verify that he or she is actually still part of your plan’s network.  Doing so may prevent some unexpected bills for out-of-network medical care and help make your selected plan work for you.

References:

CMS Report:  Online Provider Directory Review Report; Kaiser Health News Article

Q.  Tax day is coming soon and I wonder if I can claim a tax deduction for my Long Term Care Insurance Premiums paid during this past year?

A.   Depending upon your income and age, the answer may very well be ‘yes’, at least as to a portion of your premiums paid. Here’s the way it works:

AGI Threshold:  Premiums for qualified long-term care insurance policies are tax deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 10 percent of your Adjusted Gross Income. This is sometimes referred to as the “AGI Threshold”. However, in tax year 2016, taxpayers aged 65 and older only need medical expenses to exceed 7.5 percent of their income, but in 2017 they will have the same 10 percent threshold rule as everyone else.  If medical expenses do not exceed these AGI Thresholds, then they are not deductible.

Age Determines Extent of Deduction That Can Be Counted:  The amount of long-term care insurance premiums that are countable toward your AGI Threshold is based upon your age, and the amount changes each year. For the 2016 tax year, taxpayers who are aged 40 or younger can count toward their deduction only $390 a year; taxpayers between 40 and 50 can count $730; taxpayers between 50 and 60 can count $1,460; taxpayers between 60 and 70 can count $3,900; and taxpayers who are 70 or older can count up to $4,870 in LTC premiums toward their AGI Threshold.

What this means is that taxpayers must total all of their medical and LTC Premium expenses and compare them to their incomes. For example, suppose 64-year-old Frank has an adjusted gross income of $30,000 and long-term care premiums totaling $5,000, plus $1,000 in other medical expenses. Ten percent of $30,000 is $3,000, which is then his AGI Threshold. Therefore, Frank can only deduct any medical and LTC expenses that exceed $3,000. The 2016 limit for counting long-term care premiums is $3,900. That means Frank can only count $3,900 of his long-term care premiums. If he adds the countable $3,900 in long-term care premiums to the $1,000 in other expenses his total medical expenses are $4,900. He can therefore deduct $1,900 in medical expenses from his income ($4,900 — $3,000).

If Frank is 70 in 2016, the calculation changes because his medical and LTC expenses only need to exceed 7.5 percent of his income, which would be $2,250 in Frank’s case ($30,000 X 7.5% = $2,250). In essence, he has a lower qualifying AGI Threshold.  Also, the amount of premiums he can count toward his deduction is increased because of his age: because he is 70, he can count toward his threshold up to $4,870 in LTC premiums. Subtracting the 7.5 % deduction threshold from his total medical expenses, Frank can deduct $3,620 in medical & LTC expenses from his income ($4,870 + $1,000 — $2,250). In 2017, Frank will only be able to deduct medical and LTC expenses that exceed 10 percent of his income, so his qualifying AGI threshold will go up and, hence, the amount he can actually deduct from his income will go down.

In sum, the amount of your tax deduction will depend upon your age, the amount of your adjusted gross income, your applicable AGI Threshold and the extent to which your countable medical expenses exceed your AGI threshold.

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Gene L. Osofsky wishes to thank ElderLawAnswers.com for permission to revise and publish this article.

Q.  My wife and I want to make a loan to our son to help him buy a home. We are really not interested in charging interest and we might even forgive the loan in our Wills. Are there any tax implications of which we should be aware?

A. Yes, there are. Concerns regarding intra-family loans of this nature often fall into two categories:

1) The Initial Loan: Imputed Interest: If you were to make an interest-free, or below-market rate, loan to your son, the IRS would presume that the loan was really a disguised gift. Gift Tax rules would then be implicated. Depending upon the amount involved, the “loan” could trigger an obligation to file a Gift Tax Return and either (a) a reduction in your remaining lifetime exemption amount, or (b) an obligation to pay a gift tax.  Thus, in order to recognize this transaction as a true loan, the IRS requires that it carry a minimum interest rate. This minimum rate is called the Applicable Federal Rate (“AFR”), which is published monthly by the IRS.

To the extent the interest on your loan is below that rate, you and your wife would be deemed to have imputed income, even if you never actually receive any interest payments. Some people refer to this as phantom income. If you failed to report it on your tax return, the IRS could determine that you had underreported your income, and you might then be subject to income tax on the phantom interest and an under-reporting penalty.

However, if you structure the loan properly at the outset, you can avoid these Gift and Income Tax problems. Essentially, you would prepare a written promissory note which assigned a rate of interest to the loan at least equal to the then applicable AFR.  By way of example, a $50,000 loan for a three-year term made in January, 2017, must carry an interest rate at least equal to 0.96% to comply with the AFR. If for a term of 3 to 6 years the AFR would be 1.97%, and if for a term of 9 years or longer the rate would be 2.75%.  Notes payable “on demand” require use of a blended rate. Further, if the loan were secured by a recorded deed of trust on your son’s home, he may be able to claim the home-mortgage interest deduction on his own tax return.

So long as the loan were structured in this manner and the corresponding interest declared on your tax returns, you would be in good stead with the IRS.  Note: There is an exception to the imputed interest rules where the total loans outstanding to your son do not exceed $10,000, and a qualified exemption for loans between $10,000 and $100,000.

(2) Loan Forgiveness; Recognition of Income: Sometimes parents provide in their wills or trust that loans to their children are to be forgiven upon the parents’ demise. The question that arises in this context is whether the debt forgiveness results in the recognition of income to the child under the “Cancellation of Debt” (“COD”) rule. Good news: generally speaking, amounts cancelled as a result of bequests or inheritances are exceptions to the recognition of income rule, and loan forgiveness in this context would usually not result in the recognition of taxable income to the child. Another option:  use your Annual Exclusion Amount ($14,000/person/year in 2017) to partially forgive his debt each year. Same result, over time.

These rules are complex.  Anyone considering debt forgiveness would be well advised to seek professional advice as part of one’s planning.

References:  Internal Revenue Code § 1274(d) [Determination of Applicable Federal Rate]; IRC § 7872 [Treatment Of Loans With Below-Market Interest Rates]; IRS Publication 4681 [Cancelled Debts @ page 4]; Rev.Rul. 2017-2 [AFR’s for January 2017];  Rev.Rul. 2017-07 [AFR’s For March, 2017]; Historical Index of Applicable Federal Rates. Note: The AFR “Short Term” rate is for loans of 3 years or less (or demand loans); “Mid-Term” rates are for loans of 3 years to 9 years, and “Long Term” rates are for loans for a term of more than 9 years.