Category Archives: Gifting

Annual Giving: The Time is Right

Dear Liza: Does a gift to a living trust (with children and grandchildren – total of 9 beneficiaries) take a total of $13k annual exclusion or is the annual exclusion based on the beneficiaries?  Good question. Before I answer it, a little background for my loyal readers: the annual exclusion is the amount of money you are allowed to give to someone free of gift tax.  As we reach the end of the year, now is a good time to make such gifts, since each year you get a new exclusion to use. These annual gifts are in addition to the amount of money you are also allowed to give away free of gift tax over your lifetime (currently $5 million).  By skillfull use of the annual exclusion, you can transfer a lot of money to those you love without ever having to use up that lifetime exclusion–it’s a great idea, if you can afford it.

You are allowed to give $13,000 free of gift tax to EACH recipient each year. So, one person could, if they wanted to, give each person in their city $13,000 (or less) without having to report any of the gifts. However, if any one gift is more than $13,000, all of the gifts would have to be reported on a gift tax return by April 15th of the following year. And, a gift has to be a completed gift to count–a gift to a living trust is not a completed gift (because the donor could always revoke the trust at a future point).  That’s why, if a person wants to make annual gifts to children and grandchildren in trust, that trust has to irrevocable and has to be what’s called a “Crummey Trust”–which means that each beneficiary has a certain amount of time to withdraw that annual gift after it is made. If they don’t (and, of course, they don’t), the money stays in trust and the donor gets to use that annual exclusion from gift tax for each trust beneficiary.

Gifts v. Loans from Mom

Dear Liza: I want to buy a home in Arizona and my Mom wants to loan me the 40k for my 20% down. It’s from her savings account. My broker said she should do a letter saying she is “gifting” it to me.  She lives in California. Will this cause her any issues with the IRS? can she loan it instead? Your Mom can give you the money or loan you the money, it’s up to her.  If she gives you the money, she will need to file a gift tax return next year.  But, she won’t owe any gift tax because each person is currently allowed to give (I kid you not!) five million dollars, free of gift tax.  Her 40K gift to you will mean that she only has $4,960,000 left of her lifetime gifting credit. This shouldn’t cause her major trouble, right? If, instead, she’d rather make a loan to you, she can do so. But the loan should be in writing, the interest rate must be at least equal to the published federal rate (AFR) for that month, and the loan should be secured by the property. Here’s a good article on family loans that you might find helpful.

Joint Checking Accounts and Trusts

Dear Liza: My Mother passed in Feb of this year.  She opened a joint account with my Sister, so, should she become incapacitated, my sister could write checks on her behalf and it was opened with the understanding, that should something happen to my mother, the joint checking account should be split with her six other brother’s and sisters.  My sister is claiming the money is now hers to do with what she wants, who is right? This is one of those estate planning situations that come up a lot, and it’s also one where the law is clear, the moral obligations murky. Aged parents often put one child on an account like that, to make it easier to let them take care of their finances. But in making your sister the joint owner of the account, your mother also made her the legal owner of the money now because she is the surviving joint owner.  If your mother had wanted to make absolutely bullet-proof sure that any money in that account was to be split equally among all seven of you, she should have put that account into the trust (assuming that the trust splits everything seven equal ways) or named all seven of you as pay-on-death beneficiaries. But, of course, that’s no solace now. If your sister wants to honor your mother’s wishes, she could do that, but she’s not legally obligated to do so.

Do I Have To Report A Gift to the IRS?

Dear Liza, My Dad recently gave me a gift of $13,000. Do I have to report this on my income tax return next year? Nope. Gifts are not considered ordinary income under the US tax code. So, you don’t have to report the gift. If there’s any tax to be paid, it is paid by the gift-giver (in tax-speak, the ‘donor’), not by the recipient (in tax-speak, the ‘donee’). However, your very nice Dad just gave you the maximum amount that he can give to any one individual each year without having to report the gift (in tax speak, this is an ‘annual exclusion gift’), so you are both completely within the law, and the transaction is entirely tax-free. Nicely done!

Gift Tax Rules and Generous Dads

Dear Liza,  My aging dad desires to give me a cash gift ($200,000).  I have read the IRS info about him being able to give me $13,000 per year.  I also understand he could give my wife an additional $13,000 annually without either of us (giver or receiver of gift) having to report to IRS.  But what about a gift of $200,000, can he do that? Yes, he most certainly can. But I really understand your confusion. My clients get this mixed up often, too. Here’s the deal. You’ve got two gift giving concepts collapsed into one. First, you are absolutely correct that your Dad can give $13,000 to as many individuals as he choooses to, every single year, without reporting any of these gifts to the IRS. This is called the annual exclusion from the gift tax. But, if your father wants to give more than that in any year, he can do that, too. He’s also got a lifetime exclusion from the gift tax, and the amazing news is that this year (and next) this is equal to $5 million! To put it mildly, this should cover most of our gift giving ability, right? Your father can give you up to $5 million free of gift tax during his lifetime, or after his death, free of estate tax. He will need to report this gift on a gift tax return by April 15th of the year following the gift, but no tax will be due, provided he’s under that lifetime exclusion limit (which he is). Here’s another way to think about these two exclusions: the lifetime exclusion is sort of like a basketball clock, it gradually runs down as gifts are made during a donor’s life and reported to the IRS;  the annual exclusion is a gift that doesn’t even begin to run down that clock–you can make annual exclusion gifts every year without touching the lifetime exclusion.

Leaving Roth IRA to minors

Dear Liza: My father just died. He left his Roth IRA to ten family members, thrilled to be leaving us with a long-term retirement investment.  But two of the beneficiaries are under 18, and our credit union is saying that the minors can’t keep the Roth IRA, but have to cash out their shares and open custodial accounts. That’s not what my Dad would have wanted. Are they right?  Yes, most likely. Here’s the deal: a minor can inherit property, but under state law, minors can’t control that property until they’re legal adults. In California, where I practice, a minor cannot own more than $5,000 without some form of legal control and management by an adult, like a property guardianship, a custodial account, or a trust for that minor’s benefit.  A property guardian is appointed by the court, and may be a child’s parent or any person nominated by the parent. The guardianship terminates when the child becomes a legal adult — 18 in my state, but this varies by state law as well. So, check with your credit union to see if they’d permit you to keep those accounts under a property guardianship to age 18.  If so, it may be worth it to you get yourself appointed as property guardian. Alternatively, cash those accounts out, open up a custodial account at the credit union, and don’t let those kids touch that money. When the custodial accounts end (25 in my state; varies by state law), make them open up IRA’s with the money because that was your father’s wish. You can’t legally require that they do so, but you can make them feel really, really guilty if they don’t.

Does My Sister’s Husband Inherit?

Dear Liza: My Mother’s Will left ½ to me, ½ to my sister.  I am married with no children; my sister is survived by her husband and two grown children. The probate attorney said my sister’s share will go to her two children, but that her husband would inherit nothing.  If that’s true, why does my attorney want my sister’s husband to sign a Quit Claim deed?   As a general matter, unless a Will or trust states otherwise,  a parent’s inherited share is passed to their surviving issue (children, grandchildren) and not to a surviving spouse.  Of course, your mother could have left your sister’s share to your sister’s husband if she wanted to. Without reading the Will and without reviewing probate rules for your state, I can only offer you some general thoughts.  It sounds as if your attorney is just being extra careful to make sure that title to the house is clear–if you ever sell that house, the chain of title must be documented and cleared before the sale. A Quit Claim Deed documents that your brother-in-law has no claim on the property, which sounds true.  Your brother-in-law may feel more comfortable signing the Quit Claim deed if he gets his own attorney to make sure that nothing fishy is going on.

Should I Put My Son’s Name on Title?

Dear Liza,, Within a month I’m going to have a closing on a duplex house in NJ.   If I want my son to live there and manage it for us (since he lives in NJ) should I put his name in the title also?  If somebody sues him for any reason can they go after the house if his name is included in the title?  Is there any legal differences whether his name is included in the title or not?  Short answer: YES!  If you put your son’s name on title to the duplex, you are making a taxable gift to him equal to the value of percentage of the property you put in his name. You and your wife can each give him $13,000 free of gift tax ($26,000) total per year. But if the property is worth more than that, which it probably is, you’ll have to file a gift tax return by April 15th of the year following the gift, reporting the value.  Currently, you and your wife can each make gifts of up to $5 million, so you’re most likely not going to owe any gift tax on this transaction, but by reporting it, you’ll be using up a part of that lifetime gift tax exclusion. And yes, certainly, if his name is on title, creditors can go after his percentage ownership of that property.  Finally, if you put him on title now, his basis in that property (for the share that he would own) will be the original cost of the property; if, instead, he inherits it upon your death, his tax basis in that property will be stepped up to it’s then current market value (which means no capital gains tax if he sells it at that time).

Giving money to grandkids

Dear Liza: My Dad wants to start giving money to my children each year. Should I to hire a lawyer to draft a trust for this money? That’s so nice of your Dad. And smart, too. He can give $13,000 each year to each of your children (twice that if he’s married and his wife wants to make such gifts), free of any gift tax. Over time, this can really add up. Lucky you. So, here are your Dad’s choices: if he wants to keep it really simple, your Dad can give the money to your kids and you can set up a custodial acccount at a local bank or brokerage company. This is sort of like a generic, off-the-rack trust, established by state law, with standard terms. In many states, a custodial account lasts until a child reaches the age of 21. Before then, the custodian (probably you) can use the money for the minor (school tuition, summer camp, computers). At 21, the money is the child’s money and they can use it for whatever they would like to use it for (trip to Paris; race car business; college). If your Dad wants to limit the use of this money to just college, he can make these gifts to 529 Plan accounts in your children’s names. This money grows tax-free; and can be withdrawn tax-free, provided it’s used for an approved educational expense (like college). If your Dad would like the money to remain in trust past the age of 21, or would like to restrict its use to only certain things: only to buy a house after the age of 30; only for travel to exotic destinations; to stay in trust until a child is 35, that’s when an attorney should get involved. A custom-drafted trust can have restrictive terms and last for as long as the person who establishes the trust wants it to last.