annual "gift" exclusion

packrat44

packrat44

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My DW and I are intending to start gifting to our son and daughter. Our son is married, therefore my DW and I can give each our son and stepdaughter the max of $14k/ea for a total transfer of $56k. Since our daughter is single we would be limited to a max of $28k to her. Can DW and/or I gift a total of $28k to two other people (relatives) and have them gift to her so we can bring the level of gifting to the same level. I do not know of any restrictions but I do not want to run afoul of IRS regulations.
 
The IRS will go after you on it. If there is a pre arranged agreement, the IRS will collapse the transaction into a single gift from you to DD. Even though there isn't an agreement, the burden of proof will be put to you, and you will likely lose. That being said, it is done all the time and isn't always caught!


Sent from my iPad using Early Retirement Forum
 
This comes under the IRS's Step Transaction Doctrine which means the IRS can ignore the intermediate steps and treat it for what it is, i.e., a gift to your daughter.
Bruce
 
how much is your estate? This may be much a due about nothing......


Sent from my iPad using Early Retirement Forum
 
Yes, this would run afoul of IRS regulations. It only counts as a gift to that person if it truly is; if the "gift" comes with conditions to gift it to someone else, then the IRS doesn't consider it a gift from the second party but from you.
 
Im assuming your net worth is over the 10m estate tax exemption? If so, you can use a little of it, 28k a year, to equalize your DW of your 10m exemption. That way your DW can invest the money now and it will grow her estate rather than you keep the money, invest it and increase your own net worth.
Look for other acceptable ways to assist your daughter. She is single.....can you take her on vacation, pay her expenses.....can you pay for additional education.....can you go shopping together and possibly buy her some new clothes or a week's groceries?

My Mom used to slip me 5 bucks every time I visited, (55 years ago), could you slip her a few bucks whenever she visits? I'd try to stay away from re-gifting through others....that's a real no-no and could generate an overall audit. But.....every kid should be lucky enough to have parents like you.....and, you've really worked hard and/or been fortunate to be able to gift your kids. Have fun, enjoy your money and your kids!
 
Remember that the $14K per person is not a limit. Go over the $14K and your required to file a gift tax return, which results in you working down the estate tax exemption but does not result in any taxes being paid currently. Unless you are worried about estate taxes issues, this may be a minor inconvenience for keeping family peace and having your daughter enjoy the gift now rather after you have passed away.
 
Khan said:
I think directly paying medical and education expenses is not included in "gift".
Click to expand...

Just looked it up, Khan is correct. It must be a direct payment to the institution, can't pay your daughter who then pays the bill to qualify for this "qualified transfer" so not a gift for gift tax purposes.
 
Why don't you just give the lower amount to both kids. It seems you are going to penalize your daughter for not being married. Or, just give your daughter the higher amount and file the gift return. This looks like something that might cause division between your children which is the opposite of what you are intending.
 
Throwdownmyaceinthehole said:
If you pay someone else's bills,vacations, etc. that considered a 'gift'?
Click to expand...

While I agree with other posts that this seems that it would be considered a gift (unless a direct payment for some med/edu expenses), I wonder what the 'real life' experience is.

You sometimes hear of parents paying for weddings that are higher than the annual exclusion. Or they buy the kid a car for graduation? Do they really file the gift tax forms? Would this ever be tracked down?

We will paying for a portion of an upcoming wedding. I told DW I want to make the check out directly to the hall, which supposedly is 'clean'. The amount we were planning on is just over the single limit, so we could split it anyhow and be within limits. I just thought this would be better going direct to the hall, even at that, I think we will write two checks, one signed by me, one by DW (from the same account - silly laws!).

-ERD50
 
ERD50 said:
While I agree with other posts that this seems that it would be considered a gift (unless a direct payment for some med/edu expenses), I wonder what the 'real life' experience is.

You sometimes hear of parents paying for weddings that are higher than the annual exclusion. Or they buy the kid a car for graduation? Do they really file the gift tax forms? Would this ever be tracked down?

We will paying for a portion of an upcoming wedding. I told DW I want to make the check out directly to the hall, which supposedly is 'clean'. The amount we were planning on is just over the single limit, so we could split it anyhow and be within limits. I just thought this would be better going direct to the hall, even at that, I think we will write two checks, one signed by me, one by DW (from the same account - silly laws!).

-ERD50
Click to expand...

Silly is right. You can give to a political organization as an exclusion, but not to your own kids if greater than $14K. Who came up with this baloney?
 
The net worth for DW and I is a long way under the Fed limit. However, our state is one of the few states with an Estate Tax and we are above that limit.

My intent is gift equally to each family unit. Therefore, I am looking for ways to up the amout to the daughter. By giving to them earlier, the money can be in their retirement plans growing rather than increasing our estate. That way they can retire earlier.
 
packrat44 said:
The net worth for DW and I is a long way under the Fed limit. However, our state is one of the few states with an Estate Tax and we are above that limit.

My intent is gift equally to each family unit. Therefore, I am looking for ways to up the amout to the daughter. By giving to them earlier, the money can be in their retirement plans growing rather than increasing our estate. That way they can retire earlier.
Click to expand...

That's a good plan, however the max contribution to a Roth or IRA is well below your lower exemption number. On the surface it sounds fair, but your married son will be able to fund twice the amount your daughter can. Once again, an unintended penalty because she is single. And if your son's marriage dissolves your ex DIL will walk away with the gifted money.

I understand not wanting to pay estate tax, but at least that will give a completely even split when the time comes. Also since you are talking about state, not federal taxes, I'm not sure the gifting laws are identical, have you read the state law?
 
not sure about this.... can you set up a trust to make up the difference? not sure is funding a irrevocable trust for the benefit of your daughter would count as a gift to her. Just grabbing at straws.

I think these restrictions are to keep people from moving large blocks out of their estates to avoid estate taxes.

Does your state make you do gift tax returns? Even if you have to file and loose some of your exclusion (or pay a little state tax), work the numbers an see if the works better overall. you will have move the amount given out of your estate and can grow for the kids
 
I went into the Washington State tax site and they do not have a "gift" tax. Therefore, DW and I could gift to our daughter above the Fed exclusion and file the appropriate paperwork each year. We have no expectation of ever reaching the Fed estate tax exclusion as it is posted today. However, Wa State does a look-back for 3 years prior to death and any amount of gifting above the Fed gift exclusion is added back into the Wa State estate value for tax purposes. Sounds fair enough. Just do not wait until near end-of-life to make any heavy gifting.
 
so... my ramblings are useful? hope so. follow the rules and use them to do the best you can.
 
packrat44 said:
I went into the Washington State tax site and they do not have a "gift" tax. Therefore, DW and I could gift to our daughter above the Fed exclusion and file the appropriate paperwork each year. We have no expectation of ever reaching the Fed estate tax exclusion as it is posted today. However, Wa State does a look-back for 3 years prior to death and any amount of gifting above the Fed gift exclusion is added back into the Wa State estate value for tax purposes. Sounds fair enough. Just do not wait until near end-of-life to make any heavy gifting.
Click to expand...

That's good news and I hope that no matter how much you like your DIL you consider just giving your DS and DD the same amount of money and filing the returns as needed, especially since you aren't going to pay federal estate tax.
Stuff happens and a check with her name on it marked gift, is hers and hers alone..then again, aside from funding a Roth, I'm not a big fan of gifting "extra" money to adult kids as I worry it leads to lifestyle inflation and other issues.We have state tax estate issues too and haven't even considered this path.

I'm a little confused about your "gift tax" comment, the returns just keep track of the extra money you give above the ceiling and add it to your estate total.
 
bingybear said:
not sure about this.... can you set up a trust to make up the difference? not sure is funding a irrevocable trust for the benefit of your daughter would count as a gift to her. Just grabbing at straws.
Click to expand...
Oh yes it would be a gift to the daughter and also not very practical with smaller amounts.
Bruce
 
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