Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

July 24, 2012
How best to handle loans between family members

Q: I have a rental property valued at $265,000, the mortgage balance is $151,000 at 5.75%. I'm considering a loan to pay off this balance from my father's living trust account, which is in excess of $400,000. I am the sole heir and these funds are just sitting in money market accounts making .25%! I would set up documents for the loan for tax purposes pay the monthly interest to my father's account at 2.00% with a 5-year payback schedule. If my father passed, how would these funds $151,000 which would be outside the trust be viewed by the IRS? Is there an amount of money that can be outside the trust without being subject to probate or tax? - Walt, Sacramento, CA

A: A loan from a family member can benefit both parties. It is important that the loan documents are prepared properly to avoid potential problems including misunderstandings and possible adverse tax consequences. The interest rate on the loan must be set at or above the Applicable Federal Rate (AFR) in order to avoid gift tax issues. The IRS releases current AFRs each month, and the rate varies for short-, mid-, and long-term loans. The July 2012 AFR rate for a 5 year loan is .92% per year.

In your situation, your father could loan you funds from his living trust. The loan should be documented with a promissory note and, if your father wanted collateral, with a deed of trust on your rental property. So that the IRS won't characterize the loan as a gift, you will need to make timely payments to the trust, and your father should document his receipt of the payments. Your father would have to pay income tax on the interest that he receives. If your father died before the loan was fully repaid, the note would be distributed as part of the trust estate. If you are the only beneficiary, you would receive the note as part of your inheritance and the remaining debt would be extinguished.

In California, probate is not required for estates valued at less than $150,000. The $150,000 threshold amount excludes assets held in trust, payable-on-death accounts, transfer-on-death accounts, and certain other assets, but it would include an outstanding note. Thus, if the note is not held in the trust and your father died before the note was fully repaid, a probate would be required for your father's estate if the remaining unpaid balance of the note caused his probate estate to exceed the $150,000 limit.

I recommend that your father work with an experienced tax or estate planning attorney to prepare the proper documentation for this intra-family loan.

About Comments

Reader comments on Sacbee.com are the opinions of the writer, not The Sacramento Bee. If you see an objectionable comment, click the "report abuse" button below it. We will delete comments containing inappropriate links, obscenities, hate speech, and personal attacks. Flagrant or repeat violators will be banned. See more about comments here.

What You Should Know About Comments on Sacbee.com

Sacbee.com is happy to provide a forum for reader interaction, discussion, feedback and reaction to our stories. However, we reserve the right to delete inappropriate comments or ban users who can't play nice. (See our full terms of service here.)

Here are some rules of the road:

• Keep your comments civil. Don't insult one another or the subjects of our articles. If you think a comment violates our guidelines click the "report abuse" button to notify the moderators. Responding to the comment will only encourage bad behavior.

• Don't use profanities, vulgarities or hate speech. This is a general interest news site. Sometimes, there are children present. Don't say anything in a way you wouldn't want your own child to hear.

• Do not attack other users; focus your comments on issues, not individuals.

• Stay on topic. Only post comments relevant to the article at hand. If you want to discuss an issue with a specific user, click on his profile name and send him a direct message.

• Do not copy and paste outside material into the comment box.

• Don't repeat the same comment over and over. We heard you the first time.

• Do not use the commenting system for advertising. That's spam and it isn't allowed.

• Don't use all capital letters. That's akin to yelling and not appreciated by the audience.

You should also know that The Sacramento Bee does not screen comments before they are posted. You are more likely to see inappropriate comments before our staff does, so we ask that you click the "report abuse" button to submit those comments for moderator review. You also may notify us via email at feedback@sacbee.com. Note the headline on which the comment is made and tell us the profile name of the user who made the comment. Remember, comment moderation is subjective. You may find some material objectionable that we won't and vice versa.

If you submit a comment, the user name of your account will appear along with it. Users cannot remove their own comments once they have submitted them, but you may ask our staff to retract one of your comments by sending an email to feedback@sacbee.com. Again, make sure you note the headline on which the comment is made and tell us your profile name.

hide comments

On October 14, The Sacramento Bee will temporarily remove commenting from sacbee.com. While we design the upgrade, we encourage you to tell us what you like and don't like about commenting on sacbee.com and other websites. We've heard from hundreds of you already and we're listening. Please continue to add your thoughts and questions here. We also encourage you to write Letters to the Editor on this and other topics.



FOLLOW US | Get more from sacbee.com | Follow us on Twitter | Become a fan on Facebook | Get news in your inbox | View our mobile versions | e-edition: Print edition online | What our bloggers are saying

Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



October 2013

Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31