By:  Shannon K. Mumaw – Associate Attorney with Elville and Associates, P.C.

In general, the modified administration process can seem quite tedious and lengthy, especially since it comes at a point in time that is already very difficult for the people involved. As an attempt to simplify this process as much as possible, the Maryland legislature enacted a statute in 1997 to create the abbreviated procedure known as “Modified Administration.” This novel procedure was codified in Estates and Trusts §§ 5-701–5-710 and is one statutory step closer towards limiting the role of the Register of Wills and the Orphans’ Court in the administration of some estates. However, its application is somewhat limited and only applies in the administration of selected estates. When applicable, it is a great tool to expedite the administration process as its focus is on the prompt closure of an estate and distribution of assets.

Everyone’s first question is – “Which estates qualify for modified administration?”

In order to be able to proceed under modified administration, certain qualifications must be met. If the decedent is testate (passes away with a valid will), all of the residuary legatees named under the will must be individuals or entities exempt from inheritance tax. If the decedent is intestate (passes away with no will), all of the heirs at law must be individuals or entities exempt from inheritance tax. Individuals and entities who are exempt from inheritance tax can be found under § 7-203 of the Maryland Tax – General Article. In addition to being exempt from inheritance tax, all residuary legatees and heirs at law must also consent to a modified administration. A notice of consent must be filed with the Register of Wills in order for the estate to qualify.

If a residuary legatee is a trust rather than an individual person, as commonly seen in what is known as a “pour-over will,” under the current law one would look to the beneficiaries of the trust to determine if each individual or entity is exempt from inheritance tax. If each beneficiary under the trust is exempt from inheritance tax, the estate is eligible for modified administration. The identity of the trustee of said trust is not considered and will not hinder the estate’s eligibility for modified administration. This was not always the case, as it was not until the 2013 statutory amendment that the identities of the trustees were left out of the equation. 

The personal representative of the estate is not limited to any specific class of persons, as the residuary legatees or heirs at law are. There is no requirement that the personal representative must be a residuary legatee or heir at law, nor is there a requirement that the personal representative be exempt from inheritance tax. Note that under a will, only the residuary legatees must be exempt from inheritance tax. This does not include specific bequests. Thus, the existence of specific bequests to friends or relatives who are subject to inheritance tax will not curtail an estate’s eligibility for modified administration.

Additionally, to qualify for modified administration the estate must be solvent, meaning the estate’s assets exceed the estate’s debts. There must be sufficient assets to satisfy all testamentary gifts under the will of a testate decedent.

Your next question may be – “How and when do I elect modified administration?”

An election for modified administration must be filed by the personal representative of the estate within three months of the date the personal representative is appointed. It does not matter how long after the decedent’s passing the estate is opened. The three-month time period will only begin on the date the personal representative is appointed by the Register of Wills (in other words, the date the Letters of Administration are issued). It is important to note that there are no exceptions to this three-month time period as no extensions of time will be granted. If an election for modified administration is not made by the three-month deadline the election will be barred.

It is a prerequisite that the estate be opened and the personal representative be appointed before the election for modified administration can be made. Thus, the election is not part of the initial petition for probate. However, the election may be filed simultaneously with the petition for probate if so desired.

The election can be viewed as consisting of two separate parts, or rather two separate forms. The election form itself must be filed within the three-month time period, and the consents of all residuary legatees or heirs at law, as mentioned above, must be filed within the three-month time period as well. If the election is made by the three-month deadline, but the consents are not filed by the deadline, the election will not be considered valid. If at any time an interested party objects to the modified administration, it will be revoked and the administration will revert back to the administrative probate process.

Now that you have determined whether an estate qualifies for modified administration and how to make the election, your next question may be – “What do I have to do under modified administration and how long is the process?”

Under a modified administration, the only documentation that is required to be submitted to the Register of Wills is a verified final report. The final report must be filed within 10 months from the date of appointment of the personal representative. Thereafter, final distribution of the estate can occur within 12 months of the appointment of the personal representative. Failure to file the final report by the deadline will result in the revocation of modified administration, and the administration will revert back to the administrative probate process.

The duty to report to the Register of Wills under a modified administration is limited extensively in comparison to the administrative probate of a regular estate. Under the administrative probate of a regular estate, the personal representative is required to file an inventory and an information report with the Register of Wills within three months of the appointment of the personal representative. Thereafter, within six months of the inventory and information report being filed, a first accounting is due to the Register of Wills. The first accounting could be a first and final accounting, or it could be an interim accounting with additional accountings due every six months thereafter. It is not until after the final accounting is submitted to the Register of Wills and approved by the Orphans’ Court that the final distributions of the estate may occur. Modified administration abbreviates this process immensely by substituting the inventory, information report, and accounting(s) with the simple requirement of a final report. Additionally, a final report is not nearly as extensive or detailed as an accounting may be.

However, under a modified administration, an interested party may request that a formal inventory and account be provided to all interested persons. If such a request were made, the formal inventory and account would not be required to be submitted to the Register of Wills, it would only be required to be provided to the requesting interested person. Additionally, such a request would not defeat the modified administration election.

Under a modified administration, it is possible to extend the 10-month deadline for filing the final report if needed. With the consent of the personal representative and each interested party, the 10-month deadline may be extended by 90 days if the extension request is filed within the initial 10-month period.

Now you may be asking – “What is a final report?”

The intention of the final report is to provide the Register of Wills with just enough information necessary to assess the statutory probate fee and the inheritance tax, if any may be due from specific bequests. The final report consists of a Schedule A, Schedule B, and – you guessed it – a Schedule C. Schedule A lists all of the estate assets as of the date of death, along with the corresponding values. Schedule B lists all payments and disbursements, which may include any debts, taxes, funeral expenses, administration expenses, etcetera. Lastly, Schedule C calculates the net estate and lists all final distributions that are to be made.

The underlying basis for modified administration is a sense of trust between the personal representative and the residuary legatees or heirs at law. The parties are essentially agreeing that there is no need for the Register of Wills and the Orphans’ Court to keep a close eye on the administration of the estate as they do under administrative probate. Rather, everyone trusts that the personal representative will administer the estate fairly and accurately. If your estate qualifies for modified administration, I highly recommend utilizing this tool to simplify the administration process to make already difficult times a little easier.

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Unique tax benefits are available to families who have children with special needs. And thanks to recent changes in the tax code, there are opportunities to save substantial amounts of money at tax time. Thomas M. Brinker, Jr., a professor of accounting at Arcadia University in Pennsylvania, has put together a handy checklist of some potential tax benefits that could be available to families who care for a special needs child.

This list includes the tax benefits that have been available for a while and incorporates updated information from the Tax Cut and Jobs Act of 2017, the CARES Act (passed in March 2020 for COVID relief), and the American Rescue Plan of 2021 that have a direct impact on families with special needs dependents.

Following are some highlights. The complete checklist is available for download here.

Special education

If the special needs child attends a special school (or is in an institution) for the main purpose of alleviating his disability by using the facility’s resources, the cost of the child’s tuition, lodging, meals, and transportation is deductible, as are the costs of supervision and care. Regular independent schools can be classified as “special schools” if the school has a special curriculum for neurologically disabled individuals, and according to IRS regulations, their tuition costs would be deductible.

If the child is receiving private tutoring by a specialized teacher, the IRS has ruled that those fees are deductible, as are tuition fees for special education provided to dyslexic children.

Services and therapies

Prof. Brinker notes that prescribed vitamin and equestrian therapies are deductible, in addition to other group or individual programs such as art, music, dance, and play, and summer camp. It is crucial to get a doctor’s recommendation as part of the necessary paperwork.

Medical expenses

As Prof. Brinker explains, “Unreimbursed medical expenses are deductible only to the extent that the taxpayer itemizes their deductions (Schedule A) and these exceed 7.5 percent of their Adjusted Gross Income (AGI).” Note that as part of the Tax Cuts and Jobs Act of 2017, the standard deduction was significantly increased, and is $12,550 for individuals and $25,100 for couples in 2021. So only families who expect to spend substantially more than these amounts on medical care for their special needs loved one would benefit from this provision.

For families who plan on itemizing their special needs medical expenses, note that travel costs for medical treatment are deductible as follows: $50 per day of food and lodging for the taxpayer and one other person (if an overnight stay is required), and driving expenses at $.16 per mile.

Also, registration and attendance fees for medical conferences (though not food and lodging) qualify, if the conference topic relates to the condition of the dependent with special needs.

Tax-deferred and tax-advantaged accounts

Parents of children with special needs might consider enrolling in a flexible spending account (FSA) through their employer to pay for qualifying medical expenses that are not reimbursed. For 2021, the maximum annual contribution to an FSA is $2,750, and as a provision of the CARES Act, over-the-counter medications are now eligible expenses for FSAs.

Regarding early withdrawals from qualified retirement accounts such as IRAs and 401(k)s, any distributions spent on deductible medical care (i.e., amounts in excess of the 7.5 percent of AGI threshold) for dependents with special needs are not subject to the 10 percent penalty (though they are still subject to income tax).

Other benefits in Prof. Brinker’s checklist include an expanded definition of a qualifying child, who can be older than 19 if shown to have special needs and lives at home. And revised provisions mean changes to the personal and dependency exemption rates and phase-outs, as specified in the Tax Cuts Act of 2017 and the American Rescue Plan of 2021.

For Prof. Brinker’s checklist, click here.

To ensure you are taking advantage of all the tax benefits and credits available to you, consult with the special needs planning attorneys at Elville and Associates who can guide you through the planning process and ensure your planning works as intended.  Elville and Associates’ attorneys are counselors and will collaborate with you to ensure your loved one with special needs’ needs are fully addressed – ranging from public benefits, to housing, to special needs trusts, Maryland ABLE, and more.  Initial consultations are free and offer peace of mind to families as they navigate the sometimes complex world of planning.  We are here to be a resource to you in any way possible.

Managing Principal and Lead Attorney Stephen Elville, a member of the Academy of Special Needs Planners, may be reached at steve@elvilleassociates.com, or at 443-393-7696 x108.  The firm’s Community Relations Director, Jeff Stauffer, may be reached at jeff@elvilleassociates.com, or at 443-393-7696 x117.

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The year was 1983: The U.S. invaded Granada. A gallon of gas cost 96 cents. Michael Jackson’s ‘Thriller’ video premiered. That year was also the last time that Social Security recipients saw a cost-of-living increase steeper than the one just announced for 2022. This year, Social Security benefits will rise 5.9 percent, the sharpest upsurge for Social Security beneficiaries since 1983’s 7.4 percent jump. 

Cost-of-living increases are tied to the consumer price index, and rising inflation rates and gas prices caused by the ongoing coronavirus pandemic mean Social Security beneficiaries will get a large boost in 2022. The 5.9 percent increase dwarfs last year’s 1.3 percent rise, and over the past decade hikes have averaged just 1.65 percent. The average monthly benefit of $1,565 in 2021 will go up by $92 a month to $1,657 a month for an individual Social Security beneficiary, or $19,884 yearly. 

The cost-of-living change also affects the maximum amount of earnings subject to the Social Security tax, which will grow from $142,800 to $147,000.

For 2022, the monthly federal Supplemental Security Income (SSI) payment standard will be $841 for an individual and $1,261 for a couple.

Part of the increase will be eaten up by higher Medicare Part B premiums, however. The standard monthly premium for Medicare Part B enrollees has not been announced yet, but it is projected to rise $10 a month to $158.30.  And the 5.9 percent increase for Social Security beneficiaries may not be enough for seniors to keep pace with rising health care and prescription drug costs.

“You’re glad that you get a 5.9 percent increase, but it doesn’t feel like you’re getting 5.9 percent when all of your other costs are going up much higher,” said Nancy Altman, president of the advocacy group Social Security Works.

Most Social Security beneficiaries will be able to find out their specific cost-of-living adjustment online by logging on to my Social Security in December 2021. While you can still receive your increase notice by mail, you have the option to get the notice online instead.

For more on the 2022 Social Security benefit levels, click here.

For questions related to retirement planning, estate and elder law planning, contact the attorneys at Elville and Associates to schedule a consultation.  Through their education-based process and focus on collaboration, they will work to ensure peace of mind and work in partnership with your financial advisors to ensure your estate planning works in tandem with the rest of your financial planning you have in place. 

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Presenters:  Ms. Ellen Platt & Dr. Michelle Fritsch

In part one of the Elville Webinar Series’ new Wellness Series, guest presenters Ms. Ellen Platt and Dr. Michelle Fritsch will briefly summarize the last 18 months of the pandemic, discuss how it has impacted us, and how it may impact us going forward.  They will also provide you strategies to help make the best of it.

Featuring nationally renowned speakers Ms. Ellen Platt, a certified Aging LifeCare Manager and Owner of The Option Group, and Dr. Michelle Fritsch, a board certified, doctoral trained health professional and founder of Retirement Wellness Strategies and cofounder of Propel Comprehensive Wellness, this presentation is one you will not want to miss!  

 

More Webinars from Elville and Associates

The education of clients and their families through counseling and superior legal-technical knowledge is the mission of Elville and Associates.  We hold multiple educational events every month. Click to view our calendar of educational webinars and events or visit the Elville and Associates YouTube channel to view recordings of our past webinars.

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Presenters:  Ms. Ellen Platt & Dr. Michelle Fritsch

In part two of the Elville Webinar Series’ new Wellness Series, guest presenters Ms. Ellen Platt and Dr. Michelle Fritsch will discuss how change is uncomfortable and sometimes disruptive.  They will talk about how these changes can impact your daily functioning and you will be provided with strategies and supports to navigate the disruptions and prevail!

Featuring nationally renowned speakers Ms. Ellen Platt, a certified Aging LifeCare Manager and Owner of The Option Group, and Dr. Michelle Fritsch, a board certified, doctoral trained health professional and founder of Retirement Wellness Strategies and cofounder of Propel Comprehensive Wellness, this presentation is one you will not want to miss!  

 

 

More Webinars from Elville and Associates

The education of clients and their families through counseling and superior legal-technical knowledge is the mission of Elville and Associates.  We hold multiple educational events every month. Click to view our calendar of educational webinars and events or visit the Elville and Associates YouTube channel to view recordings of our past webinars.

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As a business grows its needs for additional workers increases. The law regarding employees is complex and often misunderstood or misapplied. Even innocent mistakes can result in disastrous consequences for the employer. Business law attorney Chuck Borek, J.D.,MBA, CPA, of The Borek Group, LLC and special counsel to Elville and Associates covers the following issues in this webinar session:

• Distinguishing employees from independent contractors
• Steps you must take when you hire an employee
• When you must pay an employee hourly and pay for overtime
• The effective use of written employment agreements
• Protections employees enjoy that you may not be aware of

 

 

More Webinars from Elville and Associates

The education of clients and their families through counseling and superior legal-technical knowledge is the mission of Elville and Associates.  We hold multiple educational events every month. Click to view our calendar of educational webinars and events or visit the Elville and Associates YouTube channel to view recordings of our past webinars.

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Law provides Medicaid special protections for the spouses of Medicaid applicants to make sure the spouses have the minimum support needed to continue to live in the community while their husband or wife is receiving long-term care benefits, usually in a nursing home.

The so-called “Medicaid spousal protections” work this way: if the Medicaid applicant is married, the countable assets of both the community spouse and the institutionalized spouse are totaled as of the date of “institutionalization,” the day on which the ill spouse enters either a hospital or a long-term care facility in which he or she then stays for at least 30 days. (This is sometimes called the “snapshot” date because Medicaid is taking a picture of the couple’s assets as of this date.)

In order to be eligible for Medicaid benefits a nursing home resident may have no more than $2,000 in assets (an amount may be somewhat higher in some states). In general, the community spouse may keep one-half of the couple’s total “countable” assets up to a maximum of $130,380 (in 2021). Called the “community spouse resource allowance,” this is the most that a state may allow a community spouse to retain without a hearing or a court order. The least that a state may allow a community spouse to retain is $26,076 (in 2021).

Example: If a couple has $100,000 in countable assets on the date the applicant enters a nursing home, he or she will be eligible for Medicaid once the couple’s assets have been reduced to a combined figure of $52,000 — $2,000 for the applicant and $50,000 for the community spouse.

Some states, however, are more generous toward the community spouse with Medicaid spousal protections. In these states, the community spouse may keep up to $130,380 (in 2021), regardless of whether or not this represents half the couple’s assets. For example, if the couple had $100,000 in countable assets on the “snapshot” date, the community spouse could keep the entire amount, instead of being limited to half.

The income of the community spouse is not counted in determining the Medicaid applicant’s eligibility. Only income in the applicant’s name is counted. Thus, even if the community spouse is still working and earning, say, $5,000 a month, she will not have to contribute to the cost of caring for her spouse in a nursing home if he is covered by Medicaid. In some states, however, if the community spouse’s income exceeds certain levels, he or she does have to make a monetary contribution towards the cost of the institutionalized spouse’s care. The community spouse’s income is not considered in determining eligibility, but there is a subsequent contribution requirement.

But what if most of the couple’s income is in the name of the institutionalized spouse and the community spouse’s income is not enough to live on? In such cases, the community spouse is entitled to some or all of the monthly income of the institutionalized spouse. How much the community spouse is entitled to depends on what the Medicaid agency determines to be a minimum income level for the community spouse. This figure, known as the minimum monthly maintenance needs allowance or MMMNA, is calculated for each community spouse according to a complicated formula based on his or her housing costs. The MMMNA may range from a low of $2,155 to a high of $3,259.50 a month (in 2021). If the community spouse’s own income falls below his or her MMMNA, the shortfall is made up from the nursing home spouse’s income.

Example: Joe Smith and his wife Sally Brown have a joint income of $3,000 a month, $1,700 of which is in Mr. Smith’s name and $700 is in Ms. Brown’s name. Mr. Smith enters a nursing home and applies for Medicaid. The Medicaid agency determines that Ms. Brown’s MMMNA is $2,200 (based on her housing costs). Since Ms. Brown’s own income is only $700 a month, the Medicaid agency allocates $1,500 of Mr. Smith’s income to her support. Since Mr. Smith also may keep a $60-a-month personal needs allowance, his obligation to pay the nursing home is only $140 a month ($1,700 – $1,500 – $60 = $140).

In exceptional circumstances, community spouses may seek an increase in their MMMNAs either by appealing to the state Medicaid agency or by obtaining a court order of spousal support.

Contact the elder law attorneys at Elville and Associates to find out what Medicaid spousal protections are available and what you can do to make sure your spouse has enough income to live on.  The firm’s elder law attorneys are well-versed in Medicaid law and can offer solutions and peace of mind to your family’s situation. 

For the dollar amounts that your state allows community spouses to retain, go to Find an Attorney, click on your state, and then “Key Medicaid Information” for that state.

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By:  Jeffrey D. Stauffer, Executive Director – Elville Center for the Creative Arts, Inc.

Do you have an instrument taking up space in a closet or attic not being used anymore?  Perhaps your son or daughter has moved on to other activities and their instrument could use a good home!

As the fall semester in schools is underway, the Elville Center has developed many new school partnerships that have many, many needs for instruments for students that want to participate in band or orchestra but don’t have the means to do so on their own.  And, that’s where the Elville Center and you come in.

The Elville Center for the Creative Arts depends on people like you to donate musical instruments we then refurbish so they’re like new before we get them in the hands of student musicians in music programs we support in local schools.  We also fund other educational initiatives in schools as well as in organizations such as the Columbia Orchestra and The Annapolis Symphony Orchestra, to name just a couple.  Virtually all instruments are gladly accepted – clarinets, trumpets, saxophones, violins, bassoons, flutes, guitars, cellos, baritones – and everything in between (no pianos or recorders, though – sorry!)

The Elville Center is a small charity and we work hard to make a difference in the communities we serve.  Typically, an instrument can cost  anywhere between $75 and $200 to refurbish.  And, as a small charity, we ask anyone looking to donate an instrument to consider making a monetary donation of $50 or more to help with the cost to refurbish the instrument and/or purchase necessary items such as a new case, new mouthpieces, reeds and other supplies.  If this is something you’re willing and able to do, it would be most appreciated and make a tremendous difference; however, if it is not, you’re still welcome to donate the instrument and it will find a good home with one

of our school music partners.

If you’re willing and able to donate, you can do so by visiting here — https://www.paypal.com/donate/?hosted_button_id=TPBET4HBSGC6W —

which is the donation page on our website.

The one instrument we are not accepting at this time are pianos, and this is for many reasons.  To learn how you can donate your piano, please view our suggestions on our website here.

Lastly, if you’d like the Elville Center to furnish a tax receipt for your instrument and/or monetary

donation, as a 501(c)(3) non-profit we’re very happy to do so.  The two pieces of

information we need to furnish this receipt are your full name and home address (to be used solely for this letter).

You’re welcome to drop off the instrument at our office, which is located within the office of Elville and Associates, P.C., an estate planning, elder law, and special needs planning firm based in Columbia.  The charity was founded by the firm’s Managing Principal and Lead Attorney, Stephen Elville.  I, Executive Director Jeffrey Stauffer, also work for the firm as its Community Relations Director.

To donate or for more information, please contact me at jeff@elvillecenter.org, or at 443-676-9691.  You can also fill out a contact form on our website home page by clicking here.

Thank you again for your interest in the Elville Center for the Creative Arts and have a wonderful day!  We value your support!

With appreciation,

Jeffrey D. Stauffer

Executive Director

Elville Center for the Creative Arts, Inc.

7100 Columbia Gateway Drive, Suite 190 Columbia, Maryland 21046

P:  443-393-7696 (Main)

E:  jeff@elvillecenter.org

W:  jeff@elvillecenter.org

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Inheriting real estate from your parents is either a blessing or a burden — or a little bit of both. Figuring out what to do with the property can be overwhelming, so it is good to carefully think through your choices. 

There are three main options when you inheriting real estate: move in, sell, or rent. Which one you choose will depend on your current living situation, whether or not you have siblings, your finances, whether the house has a mortgage or liens, and the physical condition of the house. The following are some things to consider:

• Taxes. In most situations, you do not have to pay taxes when inheriting real estate, but if you sell the property, you will be subject to capital gains tax. The good news is that inherited property receives a step-up in basis. This means that if you inherit a house that was purchased years ago for $150,000 and it is now worth $350,000, you will receive a step up from the original cost basis from $150,000 to $350,000. You should get an appraisal done as soon as possible to find out how much the house is currently worth. If you sell the property right away, you should not owe any capital gains taxes. If you hold on to the property and sell it for $400,000 in a few years, you will owe capital gains on $50,000 (the difference between the sale value and the stepped-up basis). On the other hand, if you use the property as your primary residence for at least two years and then sell the property, you may be able to exclude up to $250,000 ($500,000 for a couple) of capital gains from your taxes. 
• Mortgage. Does the house have a mortgage on it – either a regular mortgage or a reverse mortgage? Sometimes it is specified in the estate plan that the estate will pay off the mortgage. In cases where it doesn’t, with a regular mortgage you will likely have to assume the monthly payments. There are some mortgages, however, that require the heirs to pay off the mortgage immediately. With a reverse mortgage, you usually have a limited time to pay off the mortgage in full. 
• Repairs. After inheriting real estate, it is a good idea to hire a home inspector to assess the condition of the house. If the property needs significant repairs, it may affect what you do with it. Renovations and repairs can be costly and time-consuming. You may want to consult with a realtor before taking on any big projects. It may not make sense to spend a lot of money on the house.
• Property Maintenance. Once you inherit the property, you will be responsible for maintaining it. The first thing you want to do after inheriting real estate is make sure the utilities and homeowners’ insurance are transferred to the new owners and continue to be paid on time. You will also need to pay all the property taxes and any other fees associated with the property. 
• Other Owners. If inheriting real estate with siblings, you will all need to agree on what to do with the property. If one sibling wants the property, he or she can buy it from the other siblings. Otherwise, you can sell or rent the property and split the profits. If there is a dispute among siblings, you can try professional mediation. In mediation, the disputing parties engage the services of a neutral third party to help them hammer out a legally binding agreement that all concerned can live with. The disputing parties can control the process and they have a chance to explain their perspectives and feelings. If you go to court, the judge will likely order the house to be sold so the profits can be split. 

Ultimately, there are many decisions to make when inheriting real estate and deciding what to do with it can be a very emotional decision. If possible, try not to rush into any decisions until you’ve had time to thoroughly consider your options.  Also, be sure to speak with the estate planning attorneys at Elville and Associates to ensure your inherited real estate is accounted for in your estate plan.

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When interest rates are low, intrafamily loans can be a good way to assist a relative (typically a child) with purchasing a house or a family business, and in certain circumstances they can be used to gift money to the next generation. 

An intrafamily loan allows family members to borrow money from each other at a special rate, but it must be structured properly so that the loan is not considered a gift. This means the intrafamily loan must have a written promissory note, require repayment, and charge interest (if the loan is for more than $10,000). The IRS sets the Applicable Federal Rate (AFR) each month, and the interest on the intrafamily loan must equal the AFR. The rate is different, depending on the term of the loan, which can be a short-term loan (0-3 years), a mid-term loan (3-9 years), or a long-term loan (9 or more years). The AFR is typically lower than the interest rate a bank would charge, and the borrower’s credit doesn’t affect the loan, so someone with bad credit can still get an intrafamily loan. 

When structured properly, an intrafamily loan can assist children with purchases and pass on assets. The following are some of the ways an intrafamily loan can be used: 

• Pay for a house. An intrafamily loan can be used to fund a mortgage for children or grandchildren. Because the interest rates are lower, the children will pay less overall than going through a traditional mortgage lender. 
• Pass on a family business. Depending on how large the business is, giving away a business could exceed the prevailing gift tax exemption. Instead, parents can loan money to a child to purchase the family business. Parents who are financially able could use the annual gift limit ($15,000 in 2021) to give children money to repay the intrafamily loan. Alternatively, if the family business produces income, the child can use the income to pay back the loan. Even if the business doesn’t exceed the gift tax exemption, this can be a good strategy for parents who want to pass on the business, but still need a steady income stream. 
• Pass on assets. An intrafamily loan can be used as a method of passing on assets provided the borrower can invest the money in a way that brings in a higher rate of return than the interest rate on the loan. Given the low interest rate on an intrafamily loan, this can be a successful strategy. If the intrafamily loans are a large one, it may be wise to loan the money to a family trust. The trust invests the money and repays the loan. After the loan is repaid, the remaining assets are protected by the trust and can be distributed to beneficiaries as dictated by the trust terms. 

The downside of an intrafamily loans are the same as with any loan: The loan must be repaid. If the child defaults on the intrafamily loan, it could trigger a gift tax for the person making the loan. It is also important to have the correct paperwork and documentation. 

An intrafamily loan should only be set up in consultation with the experienced estate planning attorneys at Elville and Associates.  Consider a consultation to discuss your situation further by contacting the firm’s Legal Administrator, Mary Guay Kramer, at mary@elvilleassociates.com, or at 443-741-3635.

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