Wills, Trusts & Estates Articles by Insights

It is very common for parents to provide funds to their children over their lifetime, but are these transfers gifts or loans? A recent ruling in the Tax Court, Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, 119 T.C.M. (CCH) 1502 (June 1, 2020), highlights the importance in estate planning of differentiating between loans and gifts.

Mary Bolles was a loving mother of five children whom she tried to treat equally. Her practice was to keep a record of her advances to and the occasional repayments from each child. Based on her intent and the advice of tax counsel, she treated the advances as loans. She forgave the “debt” account of each child every year to the extent of the annual gift tax exclusion amount. According to the Tax Court, her practice would have been noncontroversial had she not advanced substantial funds to one son, Peter.

When Peter ran into financial difficulties with his architectural business, Mary supported him and between 1985 and 2007 she transferred $1,063,333 to Peter or for his benefit.

On June 19, 2020, the IRS released Notice 2020-50, which provides additional guidance and relief for retirement plan participants taking coronavirus-related distributions and loans under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Under the CARES Act, “qualified individuals” may take coronavirus-related distributions of up to $100,000 from their eligible retirement plans without being subject to the 10% additional tax on early distributions. In addition, a coronavirus-related distribution can be included in income ratably over the three-year period commencing with the year of distribution and the individual taking the distribution has three years to repay the distribution to the plan, or roll it over to an Individual Retirement Account (“IRA”) or other qualified retirement plan, with the effect of reversing the income tax consequences of the distribution. In addition, the CARES Act allows plans to suspend loan repayments due from March 27, 2020 through December 31, 2020 and further allows for an increase in the dollar amount on loans made between March 27, 2020 and September 22, 2020 from $50,000 to $100,000. Notice 2020-50 expands the definition of qualified individuals under the Act and provides additional, clarifying guidance regarding coronavirus-related distributions and loans.

Expansion of the Definition of “Qualified Individual”

Under the original language of the CARES Act, a qualified individual included the following persons:

When is Money from Family Considered a Loan Versus a Gift?

IRS Announces Additional Guidance for Coronavirus-Related Distributions and Loans