Gifting vs Inheritance

[Midpack]

Not sure why OP thinks he has to consult with his BIL regarding gifting to kids. It's your money not his. I did not consult with my executor who is the mother of one of the beneficiaries.

DW and I have a close relationship with BIL and his wife, he’s our successor trustee/executor. I don’t think he gifts his kids, probably wants them to learn how to ‘make it on their own’ - and I certainly wouldn’t want to instill any entitlement in his kids by giving them a large annual gift. The irony is we know each others trust plans, and his kids are going to do very well when we both pass…

 

[Route246]

Or you can create an artificial barrier to entry: e.g. "We would gift 1:1 match of (Roth or Traditional) IRA contributions to anyone who participate." Open invitation to all but you know who will take the "bait".

This concept is sometimes implemented as an "incentive trust" or more informally a "matching trust" and is one technique used to not demotivate heirs. We are studying this now.

 

[DrVenture]

Is this IRS "reporting" of gifting even enforceable? It sounds random. What is to stop me from transferring $20K a month to my kid via a joint checking account linked to my brokerage account? Or having him make large purchases on my credit card?

Am I missing something here?

 

[splitwdw]

DW and I have a close relationship with BIL and his wife, he’s our successor trustee/executor. I don’t think he gifts his kids, probably wants them to learn how to ‘make it on their own’ - and I certainly wouldn’t want to instill any entitlement in his kids by giving them a large annual gift. The irony is we know each others trust plans, and his kids are going to do very well when we both pass…

I don't know the ages but assumed these were adult children. Again, this is your money not your bil's. I did not consult the parents of my adult nieces and nephews when I started gifting to them. I know that one sister makes gifts to her children but have no idea about the other parents. You don't even know if your bil does. I don't understand why you would want to let your bil decide what you do with your money and you don't have to gift large annual amounts.

 

[cathy63]

Is this IRS "reporting" of gifting even enforceable? It sounds random. What is to stop me from transferring $20K a month to my kid via a joint checking account linked to my brokerage account? Or having him make large purchases on my credit card?

Am I missing something here?

As with many other tax "things", the U.S. relies on its taxpayers to self-report. The government will usually only find out about unreported gifts if one of you gets audited and the auditor finds a reason to look at your spending or accounts. There aren't many auditors left (and right now none of them are working) and the vast majority of Americans' assets are well below the line where tax would be owed so these wouldn't be profitable audits anyway ... so it's very unlikely that anyone is ever going to look.

 

[Midpack]

I don't know the ages but assumed these were adult children. Again, this is your money not your bil's. I did not consult the parents of my adult nieces and nephews when I started gifting to them. I know that one sister makes gifts to her children but have no idea about the other parents. You don't even know if your bil does. I don't understand why you would want to let your bil decide what you do with your money and you don't have to gift large annual amounts.

I explained why, but you chose to leave that out in quoting me. Beyond that, WADR you don't have to understand our choices...and you're welcome to yours.

 

[Midpack]

As I understand it, DW and I can give our nephew and 2 nieces $38,000 ($19,000x2) per year each. So a total of $114,000 in 2025 with no taxes or reporting requirements for us or the kids.

 

[audreyh1]

Is this IRS "reporting" of gifting even enforceable? It sounds random. What is to stop me from transferring $20K a month to my kid via a joint checking account linked to my brokerage account? Or having him make large purchases on my credit card?

Am I missing something here?

Not really. Nothing is reported to the IRS when you gift your kid or buy them anything. So I don’t think it could be caught. Property like a house or car has titles/title transfers on county records and is more likely to be caught. Still, someone would have to go track down the 709 you didn’t file.

 

[audreyh1]

As I understand it, DW and I can give our nephew and 2 nieces $38,000 ($19,000x2) per year each. So a total of $114,000 in 2025 with no taxes or reporting requirements for us or the kids.

Even if you gifted more, there is only a reporting requirement. No taxes owed until you exceed your estate tax exemption.

 

[SecondCor521]

Is this IRS "reporting" of gifting even enforceable? It sounds random. What is to stop me from transferring $20K a month to my kid via a joint checking account linked to my brokerage account? Or having him make large purchases on my credit card?

Am I missing something here?

I agree that you're unlikely to get caught based on what others have already posted.

Although I'm sure it's uncommon, one way to get caught is via the IRS snitch program. Taxpayers who report other taxpayers for violations can be rewarded with a percentage of the tax collected. I considered using this program one time a long time ago.

Another thing that stands in the way is guilt. For some people, even if they don't get caught, knowingly violating a tax law might result in guilt. This one sort of depends on one's views of rules in general and federal tax laws specifically.

 

[cathy63]

Although I'm sure it's uncommon, one way to get caught is via the IRS snitch program. Taxpayers who report other taxpayers for violations can be rewarded with a percentage of the tax collected.

The problem with that is the failure-to-file and late-filing penalties for Form 709 are a percentage of the tax due. Since almost everyone who is required to file the form owes $0, there's no penalty and the snitch's percentage would also be $0. This is why the IRS doesn't spend any effort looking for this kind of thing even if they get a whistleblower report. It makes no sense to pay auditors to find violations that won't even bring in enough to cover their salaries.

Now if you die with an estate that's over the lifetime exclusion limit and the estate tax return shows no prior gifts, that will be more interesting to an auditor. There's no statute of limitations on an unfiled return, so they can go back as far as they want looking for gifts that should have been reported but weren't, and the taxes and penalties plus interest will be owed by the estate.

 

[cathy63]

As I understand it, DW and I can give our nephew and 2 nieces $38,000 ($19,000x2) per year each. So a total of $114,000 in 2025 with no taxes or reporting requirements for us or the kids.

I'm sure you know this, but the limit changes annually. It's $19K for this year and next year, but it's very likely to go up in 2027.

 

[Murdock75]

We don’t have kids. Our estate will be left to one BIL and our nieces and nephews. Who knows what our estate will amount to when we’re gone in 20ish years, but today the amounts would be very substantial. The odds of us running out are remote.

The BIL has a greater NW than we do, so he doesn’t need the money - but he’s our successor trustee/executor. The nieces and nephews are financially all over the map, one who’s already amassed quite a bit in his mid 30’s, one without a penny to her name in her mid 50’s, all the others are doing OK but probably moving toward FI very slowly if at all.

I think we should gift the maximum tax free amount each year ($19K?) to some nieces and nephews now while they can really use the money, not just a large lump sum in 20ish years. [Please leave why “some” out of the this discussion] I don't care to know what they do with it. There won’t be any added tax consequences for us or them. There is no real danger we’ll come up short financially by gifting now. And we’d stop if our picture changes radically in the years ahead.

DW is adamantly opposed. She won’t say exactly why, but I think she’s afraid they’ll take it for granted and/or it will impede their financial discipline - and neither of us had any financial help from our parents as adults. And she’s convinced most of them talk to each other regularly, so if we don’t gift equally among them, it could cause friction - that’s not completely lost on me. And I think DW is subconsciously afraid we could run out ourselves in the many years ahead.

Odds are they’re all going to receive substantial lump sums when we pass, with our without gifting.

Surely others here have grappled with warm hand vs cold hand. What made you choose to gift while alive or not?

We gift money every year to kids and grandkids and it is a continuing source of joy. The three grandkids are all in college and haven't spent one penny of the money and they appreciate not having to worry about money like some of their classmates. My mom died at 92 and I was 67 at the time and the money is still in a separate account I have never withdrawn from. It didn't do us any good and we could have used the money when we were younger.

 

[sengsational]

If the market does well, the kids get a check with a comment about how the market did well and I'm just sharing the profits. Then I follow with a suggestion to put it in a low-cost total market equity fund and forget it (live off their wages, as they are doing). But that's it. No strings.

I wouldn't mind figuring out a way to share with my less-funded siblings, but it's not like I really know what the funding levels are across the six of them. And then there's the fact that my wife only has one sibling. As much as I'd like to make life better for my family, to do anything would probably run into the 'no good deed goes unpunished' category.

 

[srblanco7]

Our plan would be to help our two children (both in their early 20s) out while they’re younger. To an extent we’ve already done this - for example, both purchased their first vehicles with cash with 50 percent from their savings and 50 percent from us.

The why behind our choice is fairly straightforward - I think the gifted $$ earlier in their lives have the (potential) to be more impactful, we’re around to enjoy it with them (for example, in the case of a family vacation funded by the parents), and while I’m not looking to make their lives “easy” - helping them with achieving their own financial (or life) milestones (e.g., purchasing a first house) just seems to resonate with our values.

I’ll add that anything that we contemplate “gifting” - we do under an assumption of transparency. That is, if we do something for our daughter - we absolutely assume that our son will have awareness (and vice versa). No favorites between the two of them just different current circumstances that may warrant different gifts at different times - but always with a balanced mindset.

 

[audreyh1]

We gift money every year to kids and grandkids and it is a continuing source of joy. The three grandkids are all in college and haven't spent one penny of the money and they appreciate not having to worry about money like some of their classmates. My mom died at 92 and I was 67 at the time and the money is still in a separate account I have never withdrawn from. It didn't do us any good and we could have used the money when we were younger.

Just to point out that when you were younger your mother didn’t know if she’d need that money for long term care. That need is unknowable in advance and it’s prudent to have a good bit set aside to cover it.

 

[WhenIsItTime]

Is this IRS "reporting" of gifting even enforceable? It sounds random. What is to stop me from transferring $20K a month to my kid via a joint checking account linked to my brokerage account? Or having him make large purchases on my credit card?

Am I missing something here?

Banks and businesses are required by federal law to report cash transactions over $10,000 to the government.

Under the Bank Secrecy Act, banks and other financial institutions must file a Currency Transaction Report (CTR) with the Financial Crimes Enforcement Network (FinCEN) for any single cash deposit, withdrawal, or other transaction exceeding $10,000.

They are also required to report any suspicious activity, regardless of the amount, including attempts to circumvent the reporting threshold by breaking up large transactions into smaller ones (a practice known as "structuring"), which is illegal. FinCEN may then share this information with other agencies, including the IRS, FBI, and DEA, if they suspect illegal activity.

The main purpose isn't to detect tax fraud, but there is opportunity for the IRS to discover it and question.

When I do stock transfers to somebody else's account, ETRADE classifies it as a 'gift'. Not sure where the reporting goes.

 

[ncbill]

Banks and businesses are required by federal law to report cash transactions over $10,000 to the government.

Under the Bank Secrecy Act, banks and other financial institutions must file a Currency Transaction Report (CTR) with the Financial Crimes Enforcement Network (FinCEN) for any single cash deposit, withdrawal, or other transaction exceeding $10,000.

They are also required to report any suspicious activity, regardless of the amount, including attempts to circumvent the reporting threshold by breaking up large transactions into smaller ones (a practice known as "structuring"), which is illegal. FinCEN may then share this information with other agencies, including the IRS, FBI, and DEA, if they suspect illegal activity.

The main purpose isn't to detect tax fraud, but there is opportunity for the IRS to discover it and question.

When I do stock transfers to somebody else's account, ETRADE classifies it as a 'gift'. Not sure where the reporting goes.

None of that applies to direct account to account transfers since no cash is involved.

One should file Form 709 for gifts exceeding the annual exclusion, of course.

 

[TripleLindy]

I'm sure you know this, but the limit changes annually. It's $19K for this year and next year, but it's very likely to go up in 2027.

And as mentioned a few times, any amount above that limit only requires reporting - no tax - as long as it doesn’t exceed the lifetime limit, which is very high. We’ve gifted 6 figures to each of our 3 kids to help with house purchases. We’d rather do that now and participate rather than after we’re gone.

As an aside, that gift reporting form is the nuttiest form I think I’ve come across. It’s very confusing and hard to follow, which is compounded if you show the gift coming from both you and your spouse because you have to fill out 2 separate forms. And if I remember correctly, you have to reference each one to the other. As long as it doesn’t cause any personal problems, it’s much easier to have the gift come from just one of you. That’s what we did after filing the first time.

 

[audreyh1]

And as mentioned a few times, any amount above that limit only requires reporting - no tax - as long as it doesn’t exceed the lifetime limit, which is very high. We’ve gifted 6 figures to each of our 3 kids to help with house purchases. We’d rather do that now and participate rather than after we’re gone.

As an aside, that gift reporting form is the nuttiest form I think I’ve come across. It’s very confusing and hard to follow, which is compounded if you show the gift coming from both you and your spouse because you have to fill out 2 separate forms. And if I remember correctly, you have to reference each one to the other. As long as it doesn’t cause any personal problems, it’s much easier to have the gift come from just one of you. That’s what we did after filing the first time.

It is definitely a most confusing form, but we prefer to fill out two and have our lifetime estate tax exemptions reduced equally.

 

[WhenIsItTime]

None of that applies to direct account to account transfers since no cash is involved.

One should file Form 709 for gifts exceeding the annual exclusion, of course.

Thanks for clarifying. Doesn't seem right IRS relies on taxpayer filings to track this with brokerages and lots of electronic data typically in the process.

 

[audreyh1]

It is definitely a most confusing form, but we prefer to fill out two and have our lifetime estate tax exemptions reduced equally.

Wow, Form 709. Often a headbanger but we eventually figure out the proper way to fill it out with gift splitting.

Starting 2024 some changes to the form where each spouse signs a separate notice of consent to split the gifts to file with the form. Both 709s along with signed spousal consent forms are mailed together in the same envelope.

Apparently declaration of gift splitting is required on form 709 even if a gift comes from a joint account unlike what some online videos claim.

 

[gauss]

We have no kids - we are leaving our estate to our niece and nephew. While they really don't need the money now, their children are approaching college age. I could see doing a gifting program toward their college expenses, and then pass the rest to niece and nephew when we pass.

FA has briefly brought up gifting as a way to start funneling $ to our heirs now.

So far, DW has been against gifting. Her main reason is that she wants to make sure that she has enough $ to last her until the end of life. And who knows how much long term care will cost.

So we have not done any gifting yet, but may if she changes her mind.

You may also want to "keep your powder dry", not only for your own needs, but for surprise / worthy needs for your nieces/nephews down the line that are unpredictable.

I have a few first-hand examples to share:

1. A family member has bad teeth. He finally decides to allow his dentist to extract and replace with dentures. I say, have you considered implants instead? He says too expensive. I say why don't you let us pay for them? We can make an appointment at my (trusted) dentist to move forward. He ends up hating the dentures. I renew my offer..
2. Another family member has a problem giving money away to several younger acquaintances. He is widowed and childless. The opportunists are now dependent on him and go to him with urgent stories whenever something comes up. They are living on the edge and doing what they can do to survive - exploit an older widow who can't say no and is probably easily intimidated. Well now he realizes that 90% of his financial assets are gone and he knows he has a problem. He asks us if we want to buy his condo and rent to him. I counter offer private HECM/HELOC where we fund 100% of equity w/o fees, with the condition that the payout is a life annuity only -- not a lump sum. He declines. I suspect that he is planning to die in order to solve his problems. Bad decision.
3. A third example that I suspect may have existing in the family, would be illegal gambling debts to characters who will use violence to collect (courts are unavailable to enforce illegal debts).

In all of these cases if I had given the money away generically to others, I would not have had the capacity to offer these much higher value gifts when the situation arose.

Addressing another common comment on these types of threads. There is often the statement that you can see them benefit from your gifts now, rather than when you pass.

This seems to have an implicit assumption that viewing them receiving your gifts will bring you pleasure and not the opposite. If they are making bad choices now, giving them more $ is just going to increase the magnitude of their problems/bad decisions and then you may feel responsible.

I guess I am in DW's camp about this -- maybe fund specific one off gifts, but don't just give your money away in an untargeted fashion.

This is another reason why I would never see a financial advisor -- often they just put bad ideas into your head.

-gauss

 

[SecondCor521]

You may also want to "keep your powder dry", not only for your own needs, but for surprise / worthy needs for your nieces/nephews down the line that are unpredictable.

I have a few first-hand examples to share:

1. A family member has bad teeth. He finally decides to allow his dentist to extract and replace with dentures. I say, have you considered implants instead? He says too expensive. I say why don't you let us pay for them? We can make an appointment at my (trusted) dentist to move forward. He ends up hating the dentures. I renew my offer..
2. Another family member has a problem giving money away to several younger acquaintances. He is widowed and childless. The opportunists are now dependent on him and go to him with urgent stories whenever something comes up. They are living on the edge and doing what they can do to survive - exploit an older widow who can't say no and is probably easily intimidated. Well now he realizes that 90% of his financial assets are gone and he knows he has a problem. He asks us if we want to buy his condo and rent to him. I counter offer private HECM/HELOC where we fund 100% of equity w/o fees, with the condition that the payout is a life annuity only -- not a lump sum. He declines. I suspect that he is planning to die in order to solve his problems. Bad decision.
3. A third example that I suspect may have existing in the family, would be illegal gambling debts to characters who will use violence to collect (courts are unavailable to enforce illegal debts).

In all of these cases if I had given the money away generically to others, I would not have had the capacity to offer these much higher value gifts when the situation arose.

The three examples may make you feel better but didn't really change the outcome as far as I can tell, at least not in the first two examples. Paying off bookies in #3 may actually have a worse outcome for you - bad characters who know you have money and are willing to break the law...what could go wrong?

Addressing another common comment on these types of threads. There is often the statement that you can see them benefit from your gifts now, rather than when you pass.

This seems to have an implicit assumption that viewing them receiving your gifts will bring you pleasure and not the opposite. If they are making bad choices now, giving them more $ is just going to increase the magnitude of their problems/bad decisions and then you may feel responsible.

I've made that statement and am in the process of disclaiming part of an inheritance which will go to my three adult offspring.

I will either gain pleasure from seeing them use it well, or gain knowledge from seeing them use it poorly. I can use that (unlikely but possible) knowledge to adjust my plan so that my future inheritance to them is more likely to go well. I also believe that them practicing on a relatively small in the overall scheme of things but large-to-them-now amount will give them a better chance of doing well with the money they inherit from me.

In no case will I feel responsible for their decisions. I love my kids, but I also try to have healthy boundaries. My feeling responsible ends when I've made the best decision I can with the money that is mine and it transfers to their bank account and becomes theirs. I'll still, of course, try to help them and teach them about money since I'm their Dad.

 

[gauss]

The three examples may make you feel better but didn't really change the outcome as far as I can tell, at least not in the first two examples. Paying off bookies in #3 may actually have a worse outcome for you - bad characters who know you have money and are willing to break the law...what could go wrong?



I've made that statement and am in the process of disclaiming part of an inheritance which will go to my three adult offspring.

I will either gain pleasure from seeing them use it well, or gain knowledge from seeing them use it poorly. I can use that (unlikely but possible) knowledge to adjust my plan so that my future inheritance to them is more likely to go well. I also believe that them practicing on a relatively small in the overall scheme of things but large-to-them-now amount will give them a better chance of doing well with the money they inherit from me.

In no case will I feel responsible for their decisions. I love my kids, but I also try to have healthy boundaries. My feeling responsible ends when I've made the best decision I can with the money that is mine and it transfers to their bank account and becomes theirs. I'll still, of course, try to help them and teach them about money since I'm their Dad.

Thank you for the thoughtful reply.

I agree that dealing with your own children may be different than more distant relatives.

In my case for #1 and #2 I am still glad that I was able to make the offers rather than having pre-given the money to more distant relatives with unknown outcomes.

-gauss