A 75-year-old man living in a semi-expensive assisted living facility was expecting to receive an inheritance of nearly $146,000 when his siblings decided to sell their late mother’s home for $600,000 last year. However, he was taken aback to discover that his mother had deducted $20,000 from his payout due to an unpaid debt that dated back to 1996.
The man had taken a loan from his mother in 1996 to purchase a condo, with the intention of repaying the full amount within two years. However, due to losing his high-paying job and making poor financial decisions, he was only able to repay $5,000 towards the interest-free loan. This non-repayment led his mother to create a will highlighting his defaults, supported by a 1996 letter stating that he hadn’t repaid the loan. This evidence was the only documentation present in the will.
The man’s sister, who was his mother’s power of attorney, stopped speaking to him after learning about the financial situation. The man, who is in poor health and relies on Medicare to cover his medical bills, expressed his need for every cent of his inheritance. However, the deduction of $20,000 has put a strain on his financial situation.
Plans To Amend Mother’s Old Tax Returns
In an attempt to retrieve the full inheritance payout and prove that he had repaid $5,000 towards the loan, the man is considering amending his mother’s old tax returns. However, the loan given by his mother three decades ago was never recorded on her tax returns, which could complicate the situation. The Internal Revenue Service (IRS) may consider the loan as a gift, especially since there was no interest charged.
According to Experian, when a loan is given without interest or at a below-market rate, the IRS may deem it a gift or require the recipient to pay income taxes on imputed interest. The gift tax exclusion limit in 1996 was $10,000 per year, which was nearly double the loan amount. The man’s mother passing away last year further complicates the process of restoring the full $146,000 inheritance.
If the $20,000 deduction was classified as an official loan, the IRS would require a bad debt statement from the mother before allowing her to deduct the unpaid debt from her taxable income. TurboTax advises deducting a bad debt in the same year it becomes worthless. However, since the mother had not taken this step in the past, it would be challenging to claim the deduction now.
Who Is At Fault?
It is argued that the man could have repaid the outstanding $15,000 over 28 years with no interest accrual, had he sent his mother $50 monthly over the same period. This suggests that better prioritization of loan repayment duties could have prevented the current situation. The family may see him as a sibling who failed to repay their mother, further straining relationships.
The sister’s frustration could be attributed to the timing of the situation, as well as the potential paperwork involved in recording the $5,000 repayment with the IRS. The man’s attempts to avoid debt and potential family conflicts shortly after their mother’s passing have likely painted him in a negative light within the family.
In conclusion, the man’s mother’s decision to deduct $20,000 from his inheritance due to the unpaid debt has created financial strain and familial tensions. The lack of proper documentation and tax implications make it challenging for him to reclaim the deducted amount. Moving forward, the family will need to navigate these complexities to find a resolution that is fair to all parties involved.