Giving money to family members is a common occurrence, especially in tough economic times when many people are in need of financial help. However, before you give cash or property to a child or other relative, it's important to determine whether you're making a gift or a loan to avoid confusion and unintended tax consequences.

Unless you specify otherwise, any transfer to a child or other relative is typically presumed to be a gift. If your intention is to loan the money and have it paid back at a later date, you will need to make sure that the loan is properly documented. Having a basic promissory note in place clearly expresses your intent, and specifies the terms for repayment. In addition to providing for the time in which the loan must be paid back, the note should also provide for an interest rate of at least the Applicable Federal Rate published monthly by the Internal Revenue Service. Failure to provide for an interest rate could cause the IRS to treat the transaction as if you made a gift of the interest to the borrower.

If the intention is to make a gift, a donor needs to be aware of the limits regarding how much can be gifted in a given year and during the donor's lifetime. The Gift Tax Annual Exclusion allows donors to give up to $13,000.00 per year ($26,000.00 for married couples) to as many recipients as they choose without any gift tax consequences. To the extent that a gift exceeds the Annual Exclusion, the donor will use up a portion of his or her Lifetime Exemption of $1 million. Gifts in excess of the Annual Exclusion require the donor to file a gift tax return in order to track the amount of the Lifetime Exemption being used. Note that no gift tax will actually be due until a donor's lifetime gifts (excluding those below the Annual Exclusion amount) exceed the exemption amount of $1 million.

If you would like additional information, please contact me at (847) 705-9563 or by email at gnagler@lavellelaw.com.