If you lend money free of interest to your grown children, whether by oral agreement, unstated understanding or a promissory note, you should know that “IRS will tax the parent as if he/she received interest on the loan,” says Steve Weisman, who is senior lecturer of law, taxation and financial planning at Bentley University. Exceptions: loans of $10,000 (in total) or less if the money is not used for investing, and loans of $100,000 or less if the child has less than $1,000 in total investment income annually.
“If the [transfer of] money is not structured as a loan, it becomes a gift,” warns Patrick Monaghan of Berman McAleer. You can gift $13,000 each year ($26,000 for couples) and not be taxed.
If you’re applying for Medicaid, any transfer of nonexempt assets to another person will delay eligibility to qualify for benefits for as long as the gift would have paid for care, warns Jeffrey Asher of Eaton & Van Winkle, which specializes in elder law. An alternative: Use an intrafamily, interest-only promissory note to shield the money, because this would exempt the funds for Medicaid purposes, he says.