Lifetime Transfers as Part of an Estate Plan

Most pre-death transfers of wealth consist of transfers of money or other assets from parents to their children. As a recent article explains, these transfers can occur in many different formats, and have various impacts on those involved.

Children often ask parents to give them a portion of their would-be inheritance while the parents are still alive. The children may need money to pay off creditors, purchase a home, or start a business. If parents agree to give their children money during their lifetime, it will either be in the form of a loan or a gift.

If a parent makes a loan to a child and wishes the loan to be respected for income tax purposes, the parent must charge interest. If the interest rate is not commercially reasonable, the IRS may treat the loan as a gift. For income tax reporting purposes, interest paid on a loan is considered ordinary income for a parent. Whether the child may deduct the interest on his or her income tax return is dependent on the type and purpose of the loan.

If a parent transfers money to a child as a gift, this money will be considered when the gifting parents later apply for Medi-Cal. Currently, Med-Cal has a look back period of 30 months. This will soon double to 60 months. Parents should be aware that their gifts may cause a denial in Medi-Cal eligibility.