Legal Question in Business Law in Virginia

How do I protect my investment money given to my child

My husband and I want to give husband's son $70,000 for a building project which he has structured under a single person LLC. This money comes from the sale of one of our investment properties and is currently being held for a 1031 exchange. Is there a way to give this money to him as a 1031 exchange? We would not be getting any title to the property. If we can't use the 1031 is there a better way to give him the money without paying taxes on it...either us or him? Also how do we protect our interest in the case of the death of either the son or us or the complete failure of the venture? The son and the investment are in Virginia and my husband and I reside in Minnesota and Colorado. Thank you so much for your help.

Asked on 6/16/06, 7:54 am

4 Answers from Attorneys

Jonathon Moseley Jonathon A. Moseley

Re: How do I protect my investment money given to my child

What's missing here is that you will owe capital gains taxes on the investment property that you already sold, if you do not reinvest it in similar property. Your ownership of the new property would have to be on the same terms as the investment property you sold.

SO the question is not whether you pay taxes on money provided to your son, but taxes paid on the investment property you already sold.

You can easily loan money to your son's venture and there will be no tax impact to either you or your son's company, unless you earn interest income as a result of the transaction.

However, that is not the problem. The problem is avoiding taxes on the property you already sold. Failure to reinvest that money in similar property that you own in the same manner as what you sold would trigger taxes on the property that you already sold.

All of this, however, is far too complicated to answer in a forum like this. You really need to have a tax expert and a lawyer explore this further.

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Answered on 6/17/06, 10:06 am
David Anderson Anderson Business Law LLC

Re: How do I protect my investment money given to my child

One way to do it would be a CD sale to the LLC with a subsequent waiver of (perhaps annual) installments, which would thereupon constitute a Gift.

Call if you wish to retain representation.

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Answered on 6/16/06, 8:19 am
Robert Strupp Robert J. Strupp,Attorney at Law, PLC

Re: How do I protect my investment money given to my child

Good Morning,

As to the 1031 exchange, the seller of the "exchanged" property needs to take title to the "replacement" property. I'm not sure I understand your desire to "protect" your interest. If you desire to make an unconditional gift, you would no longer have an interest. Alternatively, you might consider a loan, to be forgiven (gifted) at some future time.

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Answered on 6/16/06, 8:44 am
Peter Brehm Peter C. Brehm & Assoc. PSC

Re: How do I protect my investment money given to my child

A 1031 exchange requires that your son have property of like kind to exchange. Since he will be requiring your cash to undertake his venture, and presumably does nto already have such property, that will not work. The best way to protect your investment is to document(and treat) the the transaction as a series of $22,000 loans (with reasonable interest) to be secured by any assets he purchases with the funds. Every year you may forgive one of the loans and not have any tax consequences. If his business goes upside down, you will have a security interest in the assets (like a bank) and will be able to sell the assets to recover their value. Of course, the value of those assets will be much less than they were purchased for, so you may want a personal guranty from your son and/or any partners he works with.

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Answered on 6/16/06, 10:23 am

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