What happens when a $20,000 loan from my mother in 1996, with only $5,000 repaid, gets deducted from my inheritance? Seeking guidance on next steps.
In a recent letter to financial expert Quentin Fottrell, a reader shared their predicament regarding a $20,000 loan they received from their mother in 1996. The reader promised to repay the loan within two years but was only able to pay back $5,000 before facing financial difficulties. As a result, the mother deducted the remaining $20,000 from the reader’s inheritance.
The reader is now seeking advice on how to rectify the situation without having to redo their taxes for 2022. They are concerned about their financial situation, living in an assisted living facility and relying on Medicare to cover their health bills.
Fottrell provides a straightforward analysis of the situation. He acknowledges the reader’s difficult circumstances but argues that over a span of 28 years, it was reasonable to expect repayment of at least $15,000. Fottrell advises the reader to take responsibility for their part in the family drama and suggests that repaying the loan should have been a priority.
Furthermore, Fottrell explains that since the loan was not recorded on the mother’s tax return, it is likely considered a gift by the Internal Revenue Service (IRS). The annual gift tax exclusion in 1996 was $10,000, meaning the mother effectively gifted twice the eligible amount. Additionally, amending the mother’s 2022 tax return to restore the full inheritance is not possible.
Fottrell highlights the importance of distinguishing between a gift and a personal loan. In this case, it appears that the IRS would consider it a gift due to the lack of interest charged on the loan. He explains that if it had been an official loan, a bad-debt statement would be required for tax purposes. However, even in that situation, the mother would likely not have been able to deduct the bad debt from the unpaid loan.
Fottrell advises the reader to shift their perspective and consider their family’s point of view. He emphasizes that the reader defaulted on a loan and a promise, and the $20,000 loan, along with the equity the mother invested in their home, should be seen as a significant contribution. Fottrell suggests that trying to record the repayment of $5,000 would only cause more frustration for the sister and prolong the drama.
In conclusion, Fottrell advises the reader to focus on what they do have in their life and make amends with their sister. He encourages them to appreciate the assistance they received from their mother and move forward without dwelling on missed opportunities for repayment.
Overall, Fottrell’s analysis provides practical advice and a realistic perspective on the reader’s situation. He highlights the importance of taking responsibility for one’s actions and approaching family conflicts with empathy and understanding.
