There are many possible circumstances where a parent or relative might want to loan an heir money out of the assets that they would have inherited. Oftentimes these loans may be secured by a promissory note that becomes an asset that the estate must account for when the maker of the note passes away. If the parent or relative forgives the loan the IRS could treat it as taxable income to the heir. While it is true that the cancellation of a note is not income because it is treated as a gift under Section 102, there is still a risk that the cancellation might be viewed as a gift on the original transaction.
Any loan made should be in writing with the terms clearly and explicitly spelled out. Many of the complicated issues dealing with an heir borrowing from an estate can be prevented by careful advanced estate planning. People considering this option should speak with an experienced estate planner to consider their options.
See Can An Heir Borrow Against Inheritance?, Wealth Management, October 31, 2015.
Special thanks to Jim Hillhouse for bringing this article to my attention.
