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IS IT A GIFT OR IS IT A LOAN? BEWARE OF LENDING WITHIN THE HOME

 IS IT A GIFT OR IS IT A LOAN? BEWARE OF LENDING WITHIN THE HOME
 NEW YORK, June 17 /PRNewswire/ -- Your daughter wants to start her own business but needs financial backing. You loan her $40,000 to lease office space and furniture and buy computer equipment. After a year in business, the venture fails and she files for bankruptcy. She cannot repay you but at least you can claim the $40,000 dollars as a deductible capital loss. Right?
 Well, not really. According to the IRS, there was no loan because there was no formal arrangement between you and your daughter. The $40,000 dollars is now classified as a gift and is subject to hefty gift taxes.
 "Structuring intrafamily transfers of wealth is tricky," explains KPMG Peat Marwick's William J. Goldberg, national director of personal financial planning. "While you may be eager to help out family members, its important to consider the tax and financial planning aspects of the transactions so you don't get into trouble with the IRS."
 The most important consideration is the type of transfer -- loan, gift, or a combination of the two. Although the type of transfer depends on individual circumstances, several factors are important -- including the relationship between participants, the terms of the transaction, the amount of interest charged, and the purpose of the transfer.
 Goldberg, offers the following tips when structuring a transfer of wealth between family members:
 -- Take advantage of annual gift tax exclusion. The IRS allows $10,000 each year ($20,000 with a spouse) to any number of individuals free of gift tax. This way you can help a child build wealth of their own without being taxed. Here's an example: you and your spouse can give $400,000 to each of your two children free of gift tax over a ten year period. If this same $400,000 dollars passes to your children through your will, it could be taxed for as much as $240,000.
 -- Unsecured loans, or those without a fixed term, are more likely to be considered gifts for tax purposes. Goldberg recommends constructing a family loan as you would a normal business deal, including documentation of a payment date and collateral.
 -- Charge interest on the loan. If you don't it will be imposed for tax purposes at the applicable federal rate, even if no money changes hands. If you make a loan at below-market rates, the difference in the amount of interest you charge and the federal rate may be subject to income and gift taxes.
 -- Use the gift tax exclusion to offset imposed interest. Here's an example: If the interest on your loan computed at the applicable federal rate would not exceed $10,000 dollars a year, the gift tax exclusion will cover it. If you do not want to "gift" the interest, you may wish to charge the applicable federal rate to avoid making the gift of imputed interest. And you can forgive the interest in the future, treating this transfer as a gift.
 -- In the above scenario about the daughter that files for bankruptcy, it would be a good idea to be listed as her creditor, because then you can cancel the debt, which would be a gift of the loan balance to your daughter.
 Through 135 offices in the United States, KPMG Peat Marwick provides industry-specific professional accounting, taxation and consulting services to a broad range of businesses and other organizations in the financial, commercial and service sectors. KPMG has more than 76,000 people worldwide and operates in 125 countries.
 -0- 6/17/92
 /CONTACT: Beth DeLisi of KPMG Peat Marwick, 212-909-5128/ CO: KPMG Peat Marwick ST: New York IN: SU:


MK-OS -- NY004 -- 0944 06/17/92 09:01 EDT
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Date:Jun 17, 1992
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