Question about gifting strategy

[billerbeck]

My daughter will settle on her first home sometime in late January 2022. My wife and I would like to gift her $100K towards the purchase and at the same time have the least impact on gift tax exclusions.

My thought right now is that my wife and I would each gift her $15K before the end of 2021 and we would each gift her another $35K in early 2022 (for a total of $100K). The reasoning is that the 2021 gifts would keep us at the gift reporting limit for 2021 (i.e., $15K each); the 2022 gifts would consume the 2022 allowed amount (i.e., $16K each) and leave $38K subject to gift tax reporting. Is there a more clever way to do this? Also, should my wife and I write separate checks? Or are single checks from a joint account OK?

Thanks in advance.

 

[DawgMan]

Ok, here's an idea (full disclosure - no clue if really "works", but just came to me). If you have brothers/sisters/parents who might cooperate maybe gift to them the balance ($38K) in $16K chunks and then ask them to gift it to your daughter??

Just trying to think outside the box!

 

[target2019]

We are gifting under the current limit (15K) for just one of us each year for the next 5 or 6 years. Could go 2X of course, but I've decided a slow roll on this makes sense in the situation here.

My thinking is that having 15K per year really helps the kid make extra payments. If there's a job loss, then the gift helps to make the base payment.

If you did 30K per year, then you could mention that you want her to use this amount to go towards the house in some way, and let her know it's her choice. After all it's a gift, right?

Whatever you do, the source of down-payment money will have to be covered when she gets a mortgage.

I wouldn't recommend gifting to brother or sister to then gift to your child.

 

[DawgMan]

I wouldn't recommend gifting to brother or sister to then gift to your child.

Curious, in terms of solving OP's tax exclusion concern, why would gifting through family not technically work? Yes, any down payment would have to be accounted for as a gift, but is there some "legal" reason it does not work as a solution??

 

[Aerides]

Make sure you discuss this in advance with your daughter, as big deposits in her bank accounts leading up to mortgage approval (and worse, in between pre-approval and closing) will be things her lender is very interested in. Lenders will not be thrilled to find out that big chunks of her assets were not earned.

 

[target2019]

I'm not a CPA or lawyer.

I think a CPA would recommend not trying to circumvent the gift tax. You'll also be asking a family member to reduce their lifetime exclusion.

Why poke the Eye Are Ess?

 

[4legsgood]

I'm not a CPA or lawyer.

... asking a family member to reduce their lifetime exclusion.

Huh? The suggestion is for gifting amounts below reporting requirements.

 

[Car-Guy]

I just fill out form 709 and don't worry about it... Until you hit the annual lifetime exclusion, no taxes are due. The lifetime exclusion amount is always subject to be changed (like any tax law) so keep track of it. For me, I'll never hit the 11.7m lifetime exclusion so no worries, YMMV.

The text below in blue is from TT which explains it better than I can.

The gift tax only kicks in after lifetime gifts exceed $11.7 million in 2021

The first thing to know about the federal gift tax is that gift givers—not gift recipients—have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than $11.7 million in cash or other assets during your lifetime.

• The lifetime exclusion was raised to $11.7 million in 2021.
• If you’re married, your spouse is entitled to a separate $11.7 million in 2021.

So, actually owing the gift tax is not a concern for most folks. But you may still have to file gift tax returns even though you don’t owe any tax.

 

[DawgMan]

Huh? The suggestion is for gifting amounts below reporting requirements.

That's what I was thinking... if you stay under the limit then my understanding is it does not subtract from the lifetime gift tax exclusion limit. Hence, my thinking was if I give Bob $15K and Bob gives Sally $15K then it is a non-taxable event (short and long term).

I was just trying to think outside the box per OP's question.

 

[Dash man]

The IRS considers passing money through other family members as coming from the original source. I wouldn’t recommend it.

 

[4legsgood]

The IRS considers passing money through other family members as coming from the original source. I wouldn’t recommend it.

I guess this means this would be considered a violation of the step-transaction doctrine.

 

[Souschef]

I struggled with ways to avoid reporting a gift to my son so he and DIL could buy a house.
I finally said, "The heck with it", and filed a form 709. I also had to send a gift letter to the lender.
With the exclusion being $11.7 mil, the $235K is down in the noise.

 

[Car-Guy]

I struggled with ways to avoid reporting a gift to my son so he and DIL could but a house.
I finally said, "The heck with it", and filed a form 709. I also had to send a gift letter to the lender.
With the exclusion being $11.7 mil, the $235K is down in the noise.

Did much the same thing earlier this year for my DD and SIL... (New house) I'll just file 709 (again) this coming reporting season. I'll still never get near the lifetime maximum, unless I win the Mega Lotto. Really pretty simple.

 

[billerbeck]

Thanks all for the good and interesting responses. I'm actually nowhere near the exclusion limit either. But I am envisioning a future where the money-grubbing pols in Washington lower the exclusion back down to where I could be affected.

 

[OldShooter]

The IRS considers passing money through other family members as coming from the original source. I wouldn’t recommend it.

There's actually an IRS catch-all rule that says any transaction done strictly to avoid taxes will be ignored.

I used to have a SCORE mentoring partner who had been a CPA for 53 years. I drove him nuts by commenting to the client that the probability of the client's getting audited was close to zero and that ought to be considered when rule-stretching was being contemplated. It seems to me that if the taxpayer has some grounds, even tenuous, to support his stretch the IRS will probably charge only interest but not penalties. I have no experience to support this theory however. Re actual fraud that is another matter and not worth the risk IMO.

 

[travelover]

I struggled with ways to avoid reporting a gift to my son so he and DIL could buy a house.
I finally said, "The heck with it", and filed a form 709. I also had to send a gift letter to the lender.
With the exclusion being $11.7 mil, the $235K is down in the noise.

Exactly. I really don't get all the worry over "gift taxes" given the exclusion levels.

 

[NW-Bound]

When we gave money to our daughter for a down payment on her 1st home, we wrote separate checks from a joint account with two different signatures.

The bank wanted us to write a letter explaining that it was a gift, and not a loan that my daughter had to pay back.

 

[4legsgood]

Exactly. I really don't get all the worry over "gift taxes" given the exclusion levels.

1) The federal exclusion is set to go down to $5 mill in 2026.

2) Some of us live in states with an estate tax, such as WA. Here exclusion is currently 2.2 mill. Currently they don't add in any gifting regardless of the size.

I finally bought in to doing Roth conversions for reducing estate size and I'm feeling happy with that.

 

[donheff]

Bypassing the gift tax rules by passing a gift through relatives is no better than simply gifting the excess amount and failing to file the tax form. The IRS is not likely to catch either offense but they are improper.

Why not just file the form? It won't cost anything now. Are you likely to eventually leave so much that the estate tax will kick in?

 

[street]

Make sure you discuss this in advance with your daughter, as big deposits in her bank accounts leading up to mortgage approval (and worse, in between pre-approval and closing) will be things her lender is very interested in. Lenders will not be thrilled to find out that big chunks of her assets were not earned.

^ this! Do things legal by lifetime gift tax exemption, tax form 709.

 

[phil1ben]

Giving a gift to a third party with the understanding that they will gift it to another for purposes of avoiding tax is not a gift to the third party. The gift must be of a "present interest" for the $15,000 exclusion to apply. A "present interest" is defined in Form 709 as: "A gift is considered a present interest if the donee has all immediate rights to the use, possession, and enjoyment of the property or income from the property." Your gift to the the third party will not satisfy this test.

If you get caught it will be deemed to be a constructive gift to the final recipient thereby not achieving your goal.........if you get caught.

 

[target2019]

We are gifting under the current limit (15K) for just one of us each year for the next 5 or 6 years. Could go 2X of course, but I've decided a slow roll on this makes sense in the situation here.

My thinking is that having 15K per year really helps the kid make extra payments. If there's a job loss, then the gift helps to make the base payment.

If you did 30K per year, then you could mention that you want her to use this amount to go towards the house in some way, and let her know it's her choice. After all it's a gift, right?

Whatever you do, the source of down-payment money will have to be covered when she gets a mortgage.

I wouldn't recommend gifting to brother or sister to then gift to your child.

Curious, in terms of solving OP's tax exclusion concern, why would gifting through family not technically work? Yes, any down payment would have to be accounted for as a gift, but is there some "legal" reason it does not work as a solution??

Huh? The suggestion is for gifting amounts below reporting requirements.

I've quoted my entire post so readers can review my entire response and its context.

If you look at phil1ben's response, you can see what I was referring to. Why poke the IRS Bear, even if your chance for auditing is low? Can you say for certain that circumventing the rules in this case will have no future repercussions for yourself or your brother? Transactions don't come into their view just because. When an audit begins on someone, a string is pulled and many interesting things come to the surface. I have no interest in passing along $15,000 in the manner you are suggesting.

I would have a problem placing a relative in a corner by asking, "I'm gonna give you $15,000 and I'd like you to give this to my daughter for her real estate downpayment." I think for many of us alarms would go off, and we'd be questioning the idea.

Technically, anything will work. You put numbers on the tax form, or don't, and what you submit works. Until it doesn't.

 

[Sunset]

....
I would have a problem placing a relative in a corner by asking, "I'm gonna give you $15,000 and I'd like you to give this to my daughter for her real estate downpayment." I think for many of us alarms would go off, and we'd be questioning the idea.

....

I question if I could find a relative I would trust to pass on the money

 

[target2019]

I question if I could find a relative I would trust to pass on the money

As I clicked send on that post I had a similar thought. Once you gift the money with a stipulation to pass it on to your daughter, the individual could simply forget about the stipulation.

 

[audreyh1]

My daughter will settle on her first home sometime in late January 2022. My wife and I would like to gift her $100K towards the purchase and at the same time have the least impact on gift tax exclusions.

My thought right now is that my wife and I would each gift her $15K before the end of 2021 and we would each gift her another $35K in early 2022 (for a total of $100K). The reasoning is that the 2021 gifts would keep us at the gift reporting limit for 2021 (i.e., $15K each); the 2022 gifts would consume the 2022 allowed amount (i.e., $16K each) and leave $38K subject to gift tax reporting. Is there a more clever way to do this? Also, should my wife and I write separate checks? Or are single checks from a joint account OK?

Thanks in advance.

It’s smart to split the gifts over the two years.

In reporting the gifts your wife and you will each report the gifts for 2022 (in 2023) on a form 709, and there is where you declare they are shared gifts. A single check from a joint account is just fine. Each of you would would be declaring half the $38K amount above the annual gift exemption as at applies against each of your exemptions individually.