Is loaning interest-free money to relatives illegal?

Quote from MsGal : Long story short, the auditor said this was illegal. I call BS but then again, I don't work for the IRS. Anyone have any idea about this? TIA!

Your assumption is wrong.

"Avoid Interest-Free Loans

If you insist on making a totally interest-free loan to a family member, the dreaded below-market interest rules may apply. If they do, you must follow complicated rules to calculate imaginary interest payments from the borrower to you. Then you get to pay real, live income taxes on the imaginary interest. The imaginary interest payments can also trigger imaginary gifts from you to the borrower, which may eat into your valuable federal gift and estate tax exemption. Crazy? Yes. But I didn't make these rules.

For loans under $100,000, there are some exceptions to the below-market loan rules. But the preferable approach is to avoid them entirely by charging an interest rate equal to the AFR. Plus I think it's best to charge some interest on family loans, just to keep the arrangement on a business-like footing. Believe me when I say that keeping things business-like can save a lot of unnecessary grief."

From here:
http://www.smartmoney.com/taxes/i...tromessage

1) How much were the sums of money?
2) When was this?
3) There are gift exemptions it was $5M per person last year. They could have simply gifted them the money tax free.

Quote from PiratesSayARRR : 1) How much were the sums of money? 2) When was this? 3) There are gift exemptions it was $5M per person last year. They could have simply gifted them the money tax free.

Doh! No, it is $13k.

Quote from PiratesSayARRR : 1) How much were the sums of money? 2) When was this? 3) There are gift exemptions it was $5M per person last year. They could have simply gifted them the money tax free.

Quote from dealgate : Doh! No, it is $13k.

There was no estate tax for inherited estates valued under $5 million prior to 2013 (now it's under $1M). You may gift up to $13k / year to someone tax-free. A married couple can each gift $13k, with some added effort.

0% interest loans are definitely illegal. Even to family members.

Quote from dealgate : Doh! No, it is $13k.

No that is the normal gift exemption. There was a $5M life time exemption for 2011 - 2012, which included both Gifts and Estate Taxes.

http://www.forbes.com/sites/rober...e-in-2013/

Quote from dhc014 : There was no estate tax for inherited estates valued under $5 million prior to 2013 (now it's under $1M). You may gift up to $13k / year to someone tax-free. A married couple can each gift $13k, with some added effort. 0% interest loans are definitely illegal. Even to family members.

The $5M also applied to gifts.

This is from my sister, a tax CPA.

*****************
Technically that is correct. How it works is you can make a gift up to $13,000 per year/per person (but not over) and you’re done – it’s tax free to you, etc. If you make a gift over $13,000, say $14,000, you must file a gift tax return Form 709 and the amount over the $13,000 goes against your lifetime maximum tax-free exemption of $5,000,000. So, you can make a gift of $5,000,000 to someone today and it will be tax free to both of you; however, then you’ve completely used up your lifetime maximum estate exemption and when you die your entire estate will be taxable – you will no longer be able to exempt the $5,000,000 from the estate.

And, you will have to pay the tax, not the donee. You are responsible for gift tax (or use of exemption) when you give a gift of over $13,000 per year/person. Who you would give it to would benefit from the $5M, but it would be your estate’s loss after you die (and/or anyone else you chose to give a gift to in your lifetime).

Quote from dealgate : This is from my sister, a tax CPA. ***************** Technically that is correct. How it works is you can make a gift up to $13,000 per year/per person (but not over) and you’re done – it’s tax free to you, etc. If you make a gift over $13,000, say $14,000, you must file a gift tax return Form 709 and the amount over the $13,000 goes against your lifetime maximum tax-free exemption of $5,000,000. So, you can make a gift of $5,000,000 to someone today and it will be tax free to both of you; however, then you’ve completely used up your lifetime maximum estate exemption and when you die your entire estate will be taxable – you will no longer be able to exempt the $5,000,000 from the estate. And, you will have to pay the tax, not the donee. You are responsible for gift tax (or use of exemption) when you give a gift of over $13,000 per year/person. Who you would give it to would benefit from the $5M, but it would be your estate’s loss after you die (and/or anyone else you chose to give a gift to in your lifetime).

Correct. You could have just asked me.

Quote from dealgate : This is from my sister, a tax CPA. ***************** Technically that is correct. How it works is you can make a gift up to $13,000 per year/per person (but not over) and you’re done – it’s tax free to you, etc. If you make a gift over $13,000, say $14,000, you must file a gift tax return Form 709 and the amount over the $13,000 goes against your lifetime maximum tax-free exemption of $5,000,000. So, you can make a gift of $5,000,000 to someone today and it will be tax free to both of you; however, then you’ve completely used up your lifetime maximum estate exemption and when you die your entire estate will be taxable – you will no longer be able to exempt the $5,000,000 from the estate. And, you will have to pay the tax, not the donee. You are responsible for gift tax (or use of exemption) when you give a gift of over $13,000 per year/person. Who you would give it to would benefit from the $5M, but it would be your estate’s loss after you die (and/or anyone else you chose to give a gift to in your lifetime).

Thank you for this info. I had no idea that loaning interest-free money was illegal. I have no idea how much they lent their kids but if the IRS took notice, I'm guessing it was a pretty large amount.

I called her tonight and told her what I read here. I could hear her husband in the background, "Fine! F*ck the government! Starting next month we're giving the kids really expensive TV's and watches and sh*t, with gift receipts. They can return everything and keep the f*cking money."



They are the kind of people that are determined to die broke so the government gets nothing. Can't say I blame them. That's certainly our plan.

Quote from MsGal : Thank you for this info. I had no idea that loaning interest-free money was illegal. I have no idea how much they lent their kids but if the IRS took notice, I'm guessing it was a pretty large amount. I called her tonight and told her what I read here. I could hear her husband in the background, "Fine! F*ck the government! Starting next month we're giving the kids really expensive TV's and watches and sh*t, with gift receipts. They can return everything and keep the f*cking money." They are the kind of people that are determined to die broke so the government gets nothing. Can't say I blame them. That's certainly our plan.

A gift is a gift however. I don't think giving expensive gifts is a loophole to tax evasion.

Quote from MsGal : Thank you for this info. I had no idea that loaning interest-free money was illegal. I have no idea how much they lent their kids but if the IRS took notice, I'm guessing it was a pretty large amount. I called her tonight and told her what I read here. I could hear her husband in the background, "Fine! F*ck the government! Starting next month we're giving the kids really expensive TV's and watches and sh*t, with gift receipts. They can return everything and keep the f*cking money." They are the kind of people that are determined to die broke so the government gets nothing. Can't say I blame them. That's certainly our plan.

it isn't illegal but there are tax implications.

i see stuff like this at work where people do stuff to reduce their net worth to qualify for federal benefits. i see it more with annuities and trusts.

http://www.buschfirm.com/publicat...y-members/

How does the government know you give people money anyway?? Do rich people really keep track of all their money??? If you give them cash, who is to know??? If they buy a car in there name, but the parents make the payments, who is ever going to know?

Quote from drew2money : How does the government know you give people money anyway?? Do rich people really keep track of all their money??? If you give them cash, who is to know??? If they buy a car in there name, but the parents make the payments, who is ever going to know?

You don't become rich by not knowing where your money is. How did they access the cash? Form 709 is the form used for reporting transfers. I suppose you could not file it and run the risk of the IRS catching it in an audit (by the way you are more likely to get audited the hire your income goes).

Quote from MsGal : Thank you for this info. I had no idea that loaning interest-free money was illegal. I have no idea how much they lent their kids but if the IRS took notice, I'm guessing it was a pretty large amount. I called her tonight and told her what I read here. I could hear her husband in the background, "Fine! F*ck the government! Starting next month we're giving the kids really expensive TV's and watches and sh*t, with gift receipts. They can return everything and keep the f*cking money." They are the kind of people that are determined to die broke so the government gets nothing. Can't say I blame them. That's certainly our plan.

So one can't give that money to their own parents or sibling, aren't we paying taxes already?? there are countries with far lenient rules.

Welcome to freedom.....LoL