Safeguarding Your Utah Estate Plan: Be Careful of Loans and Gifts

This post is the sixth in a series of posts that offer ideas for ensuring that your estate plan will be implemented as intended.

Problems often arise when an estate plan fails to address loans or lifetime gifts to a child or other estate beneficiary, or when loans are not properly documented.

If you make a loan to a child or other beneficiary of your estate plan during your lifetime, the beneficiary will still owe the outstanding balance on that loan to your estate at the time of your death, unless you have forgiven the loan during your lifetime.  You can forgive the loan in your estate plan, but your will or revocable trust must do so expressly.  If you do not expressly forgive the loan, the beneficiary will owe the outstanding balance to your estate, and the amount owed will be an asset of the estate.  For convenience, when distributions are made from the estate, the outstanding balance can be deducted from the beneficiary’s share of the estate, rather than requiring the beneficiary to pay the funds back.  But if the amount owed exceeds the beneficiary’s share of the estate, the excess must be paid by the beneficiary to the estate.

If you make a gift to a beneficiary of your estate plan during your lifetime, the rule in Utah is that the amount of that gift is not deducted from the beneficiary’s share of the estate, unless the estate plan specifies that it should be deducted from the beneficiary’s share, or unless the beneficiary has acknowledged in writing that the value of the gift should be deducted from his or her share.

These rules seem straight-forward enough.  But unfortunately, when parents transfer money to children, it isn’t always clear if the transfer was a loan or a gift, and they often fail to document the transfer properly, if at all.  Even if the transfer was intended to be a loan at first, there may be conflicting opinions as to whether it was forgiven by the parent during his or her lifetime.  And in any event, there may be widely differing opinions as to the terms of the loan and the balance that remains outstanding at the time of the parent’s death.  As a result, when the parent dies, there are often unanswered questions as to how the transfer should be treated, and ill-feelings among the children and other beneficiaries may ensue.

It is very important, therefore, to carefully document any transfer you make to your children.  Be clear as to whether it is a gift or a loan.  If it is a gift, be clear as to whether it should be deducted from the beneficiary’s share of the estate at your death.  If it is a loan, clearly document the terms of the loan, and be clear in your estate plan how it is to be treated.

For a more detailed discussion of estate planning in Utah, see Basic Utah Estate Planning on this website.

Rust Tippett is the author of this blog post.

Copyright 2014 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

This entry was posted in Safeguarding your Utah Estate Plan and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title="" rel=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>