New York Law Journal: Great Expectancies: Anticipating Inheritance

By Jeffrey A. Galant

There are orphanages … for children who have lost their parents – oh! why, why, why, are there no harbours of refuge for grown men who have not yet lost them? Samuel Butler, The Way of All Flesh, 1903.

Given their druthers, parents generally prefer to treat children equally when it comes to passing on their property upon death. This is likely due, at least in part, to the potential negative impact on children who perceive that they are being treated unfairly. Of course, situations exist where dispositive transfers can be fair and equitable, even though not in equal amounts or shares. For example, it is easy to understand why parents will provide more to a financially needy child, especially where the other child or children are financially better off. 


The estate planning choices that facilitate equality when a child has current financial needs include intra-family loans and advancements. An “advancement” is just what it suggests, i.e., a payment, defined as an irrevocable gift, that is made in anticipation of the recipient’s inheritance. New York Estates, Powers and Trusts Law (EPTL), Section 2-1.5(a). To be legally effective, an advancement, which facilitates aiding the needy child while maintaining equality among all the children, requires the parent to sign a contemporaneous writing expressing that the payment is being made in advance of an inheritance. EPTL, Section 2-1.5(b).

Alternatively, bequests or other dispositions in Wills and trusts can be drafted in a manner that utilize formulas to get to the same place in lieu of using the more formal and perhaps less flexible statutory advancement technique.

Tax Impact – Loans versus Gifts

This is a good place to examine the tax impact. We are discussing intra-family loans as compared with inter-vivos gifts. Keep in mind, that an advancement is a gift for federal gift and estate tax purposes.

An intra-family loan is a popular technique to facilitate wealth transfers to younger generations. It is simple in concept and relatively easy to implement, e.g., parent lends $x (a fixed amount) to child at y% interest (a fixed interest rate), with repayment due in z years (a fixed maturity date). A loan agreement or a promissory note will be sufficient to document the transaction. Of course, the devil is in the details. The idea is to provide the younger-generation borrower with a sum of money to invest, subject to the payment of interest to the lender at an appropriate rate.

Broadly speaking, the result is that the lender has for estate planning purposes frozen the value of the sums lent, so that the potential economic growth that such sums may generate, to the extent the value of any such growth exceeds the interest obligation, will accrue to the borrower’s benefit. This concept of intra-family borrowing can be implemented through more sophisticated arrangements utilizing trusts, for example, either on the borrower’s side, by the lender or by each.

As a threshold tax matter, it is most important to determine whether for federal gift and estate tax purposes the advance will be treated as a loan or if it will be treated as a taxable gift. This is not a novel issue. There is much case law regarding the indicia necessary to support a finding that an amount advanced constitutes indebtedness, from both the income tax and the estate and gift tax perspectives. Speaking generally, to reasonably expect the IRS to treat an intra-family advance as a loan, at the very least requires the participants (e.g., parent-lender and child-borrower) to purposefully respect the advance as a loan and closely abide its terms.

Estate of Mary Bolles

Mary Bolles’ advances of $1,063,333 between 1985 and 2007 to her son Peter presented this exact issue to the US Tax Court. See, Estate of Mary Bolles, T.C. Memo 2020-71, affirmed, Docket No. 22-70192 (9th Cir, 2024). Based upon her tax counsel’s advice, Mary structured the advances for Peter, and her other four children as well, as loans. Noteworthy to Mary’s estate planning, was her intent to treat her children equally, as reinforced by her revocable trust which ultimately provided that the amount of a child’s outstanding loans at the time of Mary’s death would offset, i.e., be treated as if received on account of, such child’s share of Mary’s property.

Although Mary initially established the advances as part of estate and tax planning, including forgiving amounts advanced to take advantage of annual gift tax exclusions, in Peter’s case, he apparently needed the funds for both professional and personal reasons. Peter practiced as an architect.

Let us look at what the Tax Court had to say.

The court applied the factors set forth in Miller v. Commissioner, T.C. Memo. 1996-3,113 F.3d 1241 (9th Cir. 1997), in analyzing Mary’s advances to Peter to decide whether a particular advance was a loan or a gift. The factors considered were whether:

(1) there was a promissory note or other evidence of indebtedness;

(2) interest was charged;

(3) there was security or collateral;

(4) there was a fixed maturity date;

(5) a demand for repayment was made;

(6) actual repayment was made;

(7) the borrower had the ability to repay;

(8) records maintained by the lender and/or the borrower reflect the transaction as a loan; and

(9) the manner in which the transaction was reported for federal tax purposes is consistent with a loan.

Adhering to a “longstanding principle” concerning intra-family borrowings, the court stressed the critical importance of determining whether with respect to an advance the purported lender had both an actual expectation of repayment and the actual intent to enforce the purported debt. See, Estate of Van Anda v. Commissioner, 12 T.C. 1158, 1162 (1949), aff’d per curiam, 192 F.2d 391 (2d Cir. 1951).

While Mary recorded the advances to Peter as loans and kept track of interest, there were no loan agreements or attempts to enforce repayment, and Peter did not provide security for any of the advances. The reasonable possibility of repayment was considered by the court to be an objective measure of Mary’s intent, and Mary’s estate maintained that during her life she always considered the advances to be loans.

Be that as it may, the court was of the view that by October 27, 1989, Mary must have realized that Peter was unable to repay her loans, as evidenced at such time by Peter’s actions as well as by the terms of her revocable trust. As the story unfolded, Peter acknowledged in writing that he lacked the assets and the earnings needed to make repayments, and Mary’s trust expressly blocked Peter from receiving any assets upon her death. Accordingly, concluded the court, that in 1990 the purported “loans” lost such characterization for tax purposes and became anticipatory advances of Peter’s inheritance from Mary.

 In other words, the Tax Court concluded that for gift and estate tax purposes, the advances that Mary made to Peter through 1989 were loans, whereas the advances she made after 1989 were gifts. The Ninth Circuit agreed with the Tax Court and expressly upheld the Tax Court’s ability to pick and choose, i.e., determine that some of the advances were loans and that some were gifts.

Mary’s estate made a jurisdictional challenge to the Tax Court’s decision by arguing that based on the express language of the IRS’ Notice of Deficiency (90-day Letter), the Tax Court had but a binary choice, i.e., that the advances had to be considered as a whole rather than on a piecemeal basis, and as such the court’s authority was limited to just deciding whether the total sum advanced to Peter ($1,063,333) was a loan or a gift.

Without getting into the nitty gritty of the actual language at issue or the technical arguments made by Mary’s estate, suffice it to say that the Ninth Circuit rejected any such limitation and held that the Tax Court’s authority is not restricted by what the parties have provided in their pleadings (presumably including the 90-day Letter). Meanwhile, stay tuned, Mary’s estate has petitioned the Ninth Circuit for a rehearing.

Tax Wrinkles

Some interesting wrinkles to ponder regarding the tax character of an advance. Whether a loan or a gift is involved, ultimately there will be a gift tax or estate tax consequence. But note how the character of the advance affects the amount of the transfer for tax purposes. To the extent that the advances were treated as loans remaining unpaid at Mary’s death, the value of the loans at such time would be includible in Mary’s gross estate for federal estate tax purposes.

On the other hand, to the extent the advances were treated as gifts, Mary would have had to report the amount of the advances for federal gift tax reporting purposes at the time an advance was made, and, furthermore, although technically not in the gross estate for federal estate tax purposes, to similar effect, the amount of any such advances would be considered  “adjusted taxable gifts” for federal estate tax purposes and would be subject to estate taxation in Mary’s estate. (Double taxation should be avoided since the gift taxes paid will be applied against any estate tax liability attributable to the adjusted taxable gifts.)

Also note the effect of timing. If an advance is a gift, the amount of the gift for gift tax and “adjusted taxable gift” purposes is the amount advanced. Whereas, if the advance is a loan, the amount includible in a lender’s gross estate would be the value (not necessarily the amount) of the outstanding obligation at the time of death.

So, for example, in the case of an advance of $1,000 which is treated as a loan, the loan would be valued for estate tax purposes as of the time of the lender’s death, meaning, for example, the advance could be worth less than $1,000 due to lack of creditworthiness and/or other factors. On the other hand, if the advance was treated as a gift, the amount of the gift would be $1,000 for all gift and estate tax purposes.

Reprinted with permission from the New York Law Journal, An ALM Publication

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