Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

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juno818
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Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by juno818 » Sun Mar 25, 2018 7:10 pm

I have approx $200k unrealized long term capital gains in individual stocks that is giving me a headache. My child is also in private K-12 with a tuition of about $20k a year. I'm currently in the highest tax bracket.

I have a parent with negligible income. I would like to gift her up to the annual tax-exclusion limit $15,000 (from me) or $30k(from wife and I) of our appreciated stocks. She will then in turn sell off X amount of the stocks to keep herself at 0% long term capital gain rate. Shen then pays our child's private school tuition. Repeating the same steps each year.

Would this work or would the IRS consider this a sham? From my understanding - neither the gifting from us to grandparent nor the grandparent paying private school tuition require filing to the IRS.

Thanks!

Gill
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Gill » Sun Mar 25, 2018 7:38 pm

You might get away with it, but IMO it violates the Step Transaction Doctrine and the IRS could ignore the intermediate steps and treat it as if you sold the stock and paid the tuition.
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rob
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by rob » Sun Mar 25, 2018 7:44 pm

Yeah... Not really a "gift" is it?
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willthrill81
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Sun Mar 25, 2018 8:05 pm

juno818 wrote:
Sun Mar 25, 2018 7:10 pm
I have approx $200k unrealized long term capital gains in individual stocks that is giving me a headache. My child is also in private K-12 with a tuition of about $20k a year. I'm currently in the highest tax bracket.

I have a parent with negligible income. I would like to gift her up to the annual tax-exclusion limit $15,000 (from me) or $30k(from wife and I) of our appreciated stocks. She will then in turn sell off X amount of the stocks to keep herself at 0% long term capital gain rate. Shen then pays our child's private school tuition. Repeating the same steps each year.

Would this work or would the IRS consider this a sham? From my understanding - neither the gifting from us to grandparent nor the grandparent paying private school tuition require filing to the IRS.

Thanks!
If all of this happens in the same year, and especially if it happens in multiple years in sequence, the IRS might look on it unfavorably. If you gave them the money in year 1 and they paid for their grandkids' tuition in years 2 or 3, it would look much more reasonable.

But as you note, there are no filing requirements for gifts below the exemption level nor for grandparents paying for tuition. This is definitely a 'gray' area.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by afan » Mon Mar 26, 2018 9:08 am

It is not entirely true that none of this would be reported.
the grandparent would have to report the stock sale and when it was acquired.
So the IRS would see a recurring pattern of stock gifted (preserving your basis) and sold.
The IRS would not see the grandparent paying the tuition.

I am no tax expert, so I offer no opinion as to whether this is allowed.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by jj » Mon Mar 26, 2018 10:00 am

afan wrote:
Mon Mar 26, 2018 9:08 am

the grandparent would have to report the stock sale and when it was acquired.
So the IRS would see a recurring pattern of stock gifted (preserving your basis) and sold.
I'm in a different situation here with us funding gifts to a child's UGMA account with appreciated stock, then taking advantage of the child's tax allowances to tax-gain-harvest small amounts of gain each year.

When that stock is sold the date of the gift to the recipient is not on the tax return. The relevant dates are 'date of purchase' (the donor's original date of purchase and cost basis) and the date of sale.

I would think that the only time that this would be of any interest to anyone is if the grandparent is trying to claim Medicaid or some other benefits in the future. Lookback periods, etc. may result in authorities wondering where this money has come from and where it went.

As already pointed out ethically it is suspect in other regards due to the 'step' nature of the transaction... the grandparent can be under no legal obligation to pay for the grandchild's school tuition under this arrangement.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Mon Mar 26, 2018 10:28 am

jj wrote:
Mon Mar 26, 2018 10:00 am
As already pointed out ethically it is suspect in other regards due to the 'step' nature of the transaction... the grandparent can be under no legal obligation to pay for the grandchild's school tuition under this arrangement.
I don't see an ethical problem here at all for that precise reason: it is the grandparent's decision as to whether to use the donated stock to fund their grandchildren's tuition. Further, it is not even the parent's responsibility to pay for this tuition. Legally, that obligation lies solely with the student.

Would we have an ethical problem with it if the grandparents then used the proceeds to pay for someone else's tuition? I doubt it very much.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Gill » Mon Mar 26, 2018 10:33 am

willthrill81 wrote:
Mon Mar 26, 2018 10:28 am
jj wrote:
Mon Mar 26, 2018 10:00 am
As already pointed out ethically it is suspect in other regards due to the 'step' nature of the transaction... the grandparent can be under no legal obligation to pay for the grandchild's school tuition under this arrangement.
I don't see an ethical problem here at all for that precise reason: it is the grandparent's decision as to whether to use the donated stock to fund their grandchildren's tuition. Further, it is not even the parent's responsibility to pay for this tuition. Legally, that obligation lies solely with the student.

Would we have an ethical problem with it if the grandparents then used the proceeds to pay for someone else's tuition? I doubt it very much.
You're ignoring the intent of the transaction. It would be given to the grandparents with the specific intent they use it to pay for the child's education. Other posters have discussed how this might or might not come to the attention of the IRS. That is irrelevant. As I discussed above, it is very clear this is a step transaction and the IRS will look at the clear intent and treat it as if the parents sold the stock and then gave the proceeds to the children. You can't sugarcoat it. The OP is trying to make the transaction look like something that it is not.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Mon Mar 26, 2018 11:42 am

Gill wrote:
Mon Mar 26, 2018 10:33 am
willthrill81 wrote:
Mon Mar 26, 2018 10:28 am
jj wrote:
Mon Mar 26, 2018 10:00 am
As already pointed out ethically it is suspect in other regards due to the 'step' nature of the transaction... the grandparent can be under no legal obligation to pay for the grandchild's school tuition under this arrangement.
I don't see an ethical problem here at all for that precise reason: it is the grandparent's decision as to whether to use the donated stock to fund their grandchildren's tuition. Further, it is not even the parent's responsibility to pay for this tuition. Legally, that obligation lies solely with the student.

Would we have an ethical problem with it if the grandparents then used the proceeds to pay for someone else's tuition? I doubt it very much.
You're ignoring the intent of the transaction. It would be given to the grandparents with the specific intent they use it to pay for the child's education. Other posters have discussed how this might or might not come to the attention of the IRS. That is irrelevant. As I discussed above, it is very clear this is a step transaction and the IRS will look at the clear intent and treat it as if the parents sold the stock and then gave the proceeds to the children. You can't sugarcoat it. The OP is trying to make the transaction look like something that it is not.
Gill
"The intent, or end result, test combines a series of closely related events that do not have independent purposes."
https://en.wikipedia.org/wiki/Step_transaction_doctrine

Are there no independent purposes with adult children giving their aging parents stock or with grandparents pay for this grandchildren's tuition? Does giving your aging parents assistance preclude them from helping anyone else? It's not a slam dunk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Afty » Mon Mar 26, 2018 11:46 am

willthrill81 wrote:
Mon Mar 26, 2018 11:42 am
"The intent, or end result, test combines a series of closely related events that do not have independent purposes."
https://en.wikipedia.org/wiki/Step_transaction_doctrine

Are there no independent purposes with adult children giving their aging parents stock or with grandparents pay for this grandchildren's tuition? Does giving your aging parents assistance preclude them from helping anyone else? It's not a slam dunk.
Look at the title of this thread: "Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition." It's pretty clear why the gifting is being done.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Mon Mar 26, 2018 11:53 am

Afty wrote:
Mon Mar 26, 2018 11:46 am
willthrill81 wrote:
Mon Mar 26, 2018 11:42 am
"The intent, or end result, test combines a series of closely related events that do not have independent purposes."
https://en.wikipedia.org/wiki/Step_transaction_doctrine

Are there no independent purposes with adult children giving their aging parents stock or with grandparents pay for this grandchildren's tuition? Does giving your aging parents assistance preclude them from helping anyone else? It's not a slam dunk.
Look at the title of this thread: "Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition." It's pretty clear why the gifting is being done.
It seems that way to us, but the courts might look at in another light. The grandparents would be the one's paying for the child's tuition.

For instance, if I gift money to my elderly parents, does that preclude them from giving Christmas presents to any family members? If not, then this whole 'legal problem' (as an aside, laws and ethics are FAR from equivalent) is merely one of degrees.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Lastrun » Mon Mar 26, 2018 1:03 pm

I don't see the step transaction doctrine as it relates to the gift as the issue. In the context of a GIFT, the doctrine would be applied to recast the transaction as one where the OP would be the donor of the gift, not the grandparents. Who cares, as the tuition payments would likely be non-taxable under IRC Sec. 2503(e) irrespective of the donor.
Gill wrote:
Mon Mar 26, 2018 10:33 am
As I discussed above, it is very clear this is a step transaction and the IRS will look at the clear intent and treat it as if the parents sold the stock and then gave the proceeds to the children.
The sale of the stock in the grandparent's tax bracket is the issue--who is the seller of the shares for income tax purposes.

An analogy is the charitable stock bailout cases where a taxpayer transfers shares of appreciated stock in their company to their charitable trust immediately prior to the big sale. The sale by the charitable trust avoids capital gains taxes.

This is one of those areas of the tax law where tectonic plates of the assignment of income and step transaction doctrines grind against each other. Court opinions tend to rise or fall based on the existence of a prearranged plan.

There is a also lot of case law out there for: (1) people transferring to other family members, then back to their kids to increase the annual exclusion gifts, (2) cross gifts among family members where Uncle X gives to the Y nieces and nephews, and Uncle Y gives to the X nieces and nephews also to increase the annual exclusion gifts. These decisions also typically hinge on whether there is a predetermined plan.

IRS scrutiny awaits any related party transaction that results in a lower tax collection to the fisc, regardless of doctrines or ethics.

Hope the grandparents are good perjurers on the stand. :D

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by a5ehren » Mon Mar 26, 2018 2:29 pm

Let's put it this way - is the $40k you'd save on taxes enough to pay for the lawyers you'd have to hire to maybe convince the IRS that this isn't what you're doing? I'm guessing not.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by noraz123 » Mon Mar 26, 2018 2:41 pm

a5ehren wrote:
Mon Mar 26, 2018 2:29 pm
Let's put it this way - is the $40k you'd save on taxes enough to pay for the lawyers you'd have to hire to maybe convince the IRS that this isn't what you're doing? I'm guessing not.
I think that's the wrong way to look at it. In this case, it seems to be a step transaction, but in areas where it is more ambiguous and gray, why not take action that saves taxes? If the IRS disallows, instead of fighting it, just pay the tax (+ interest).

Is the $40k you save on taxes now worth the possibility that the irs disallows it and the interest you'd pay later? I'd say yes.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by PhilosophyAndrew » Mon Mar 26, 2018 2:50 pm

My ethical intuition is ringing loudly: This idea is unethical and the OP should not consider implementing it. Sure, it is pleasant to avoid paying taxes, but to me idea reads feels like tax cheating.
Last edited by PhilosophyAndrew on Mon Mar 26, 2018 4:22 pm, edited 1 time in total.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Mon Mar 26, 2018 3:01 pm

PhilosophyAndrew wrote:
Mon Mar 26, 2018 2:50 pm
My ethical intuition is ringing loudly: This idea is unethical and the OP should not consider implementing it. Sure, it ispleasant to avoid paying taxes, but to me idea reads feels like tax cheating.
Tax evasion is illegal, but tax avoidance is perfectly legal. Contrary to what some are asserting, this not necessarily a case of the 'step doctrine', which isn't even a formal law, just a rather amorphous judicial practice.

Again, giving a gift to your parents does not prevent them from giving your kids Christmas presents.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Nate79 » Mon Mar 26, 2018 3:12 pm

Gifting a set amount to another party and then that party using the exact amount to pay for the first parties expense to reduce taxes is clearly a step transaction.

Gifting a set amount and then that other party using that money for a variety of expenses which may include the first parties expense would probably not be a step transaction.

Something in the middle would be grey area I think.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by juno818 » Mon Mar 26, 2018 3:29 pm

.....
Last edited by juno818 on Mon Mar 26, 2018 3:40 pm, edited 1 time in total.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by a5ehren » Mon Mar 26, 2018 3:38 pm

willthrill81 wrote:
Mon Mar 26, 2018 3:01 pm
PhilosophyAndrew wrote:
Mon Mar 26, 2018 2:50 pm
My ethical intuition is ringing loudly: This idea is unethical and the OP should not consider implementing it. Sure, it ispleasant to avoid paying taxes, but to me idea reads feels like tax cheating.
Tax evasion is illegal, but tax avoidance is perfectly legal. Contrary to what some are asserting, this not necessarily a case of the 'step doctrine', which isn't even a formal law, just a rather amorphous judicial practice.

Again, giving a gift to your parents does not prevent them from giving your kids Christmas presents.
No, put posting in a public forum "I'm thinking about giving my parents $x in appreciated assets with the expectation they turn around and spend that money on something I was going to spend it on anyway" isn't going to get you a ton of leniency from the IRS.

If this is getting past the hypotheticals, someone in the 37% bracket can afford to consult with a member of their local bar, I would think.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by F150HD » Mon Mar 26, 2018 3:56 pm

Gill nailed it in post 2.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by afan » Mon Mar 26, 2018 4:02 pm

Interesting.

I read Gill's first comment as meaning that it MIGHT be seen that way. His second comment seems to say it is definitely a forbidden step transaction. Assuming other lawyers agree with him, it might be safer to forget about this move.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by PhilosophyAndrew » Mon Mar 26, 2018 4:21 pm

willthrill81 wrote:
Mon Mar 26, 2018 3:01 pm
Tax evasion is illegal, but tax avoidance is perfectly legal.

Again, giving a gift to your parents does not prevent them from giving your kids Christmas presents.
Some legal acts are unethical. If, In fact, this quid pro quo scenario is legal, it might be an example of this. I find your Christmas gift example inapt because it ignores this quid pro quo element.

The OP’s question itself suggests that the idea makes OP at least a little ethically queasy. And the extended discussion of whether the IRS would be in a position to detect someone who acted this way likewise suggests that this is not an ethically clean scenario.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Mon Mar 26, 2018 4:24 pm

PhilosophyAndrew wrote:
Mon Mar 26, 2018 4:21 pm
willthrill81 wrote:
Mon Mar 26, 2018 3:01 pm
Tax evasion is illegal, but tax avoidance is perfectly legal.

Again, giving a gift to your parents does not prevent them from giving your kids Christmas presents.
Some legal acts are unethical. If, In fact, this quid pro quo scenario is legal, it might be an example of this. I find your Christmas gift example inapt because it ignores this quid pro quo element.

The OP’s question itself suggests that the idea makes OP at least a little ethically queasy. And the extended discussion of whether the IRS would be in a position to detect someone who acted this way likewise suggests that this is not an ethically clean scenario.
Avoiding taxes is not unethical, and the courts have explicitly said so.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by denovo » Mon Mar 26, 2018 4:27 pm

Gill wrote:
Sun Mar 25, 2018 7:38 pm
You might get away with it, but IMO it violates the Step Transaction Doctrine and the IRS could ignore the intermediate steps and treat it as if you sold the stock and paid the tuition.
Gill
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by PhilosophyAndrew » Mon Mar 26, 2018 4:35 pm

willthrill81 wrote:
Mon Mar 26, 2018 4:24 pm
PhilosophyAndrew wrote:
Mon Mar 26, 2018 4:21 pm
willthrill81 wrote:
Mon Mar 26, 2018 3:01 pm
Tax evasion is illegal, but tax avoidance is perfectly legal.

Again, giving a gift to your parents does not prevent them from giving your kids Christmas presents.
Some legal acts are unethical. If, In fact, this quid pro quo scenario is legal, it might be an example of this. I find your Christmas gift example inapt because it ignores this quid pro quo element.

The OP’s question itself suggests that the idea makes OP at least a little ethically queasy. And the extended discussion of whether the IRS would be in a position to detect someone who acted this way likewise suggests that this is not an ethically clean scenario.
Avoiding taxes is not unethical, and the courts have explicitly said so.
You are again failing to distinguish legality from morality. The courts have decided that there exist legal forms of tax avoidance. This does not allow us to conclude that the OP’s quid pro quo scenario is ethical.

Perhaps we have different ethical set points about what makes us squeamish. If so, that is okay. But the Wikipedia article you linked to does not invalidate my personal judgment that this quid pro quo crosses an ethical line. The OP may or may not share my judgment, but the concerns many have raised provide good reason carefully to consider the possibility that the proposed quid pro quo is bad news.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by willthrill81 » Mon Mar 26, 2018 4:40 pm

PhilosophyAndrew wrote:
Mon Mar 26, 2018 4:35 pm
willthrill81 wrote:
Mon Mar 26, 2018 4:24 pm
PhilosophyAndrew wrote:
Mon Mar 26, 2018 4:21 pm
willthrill81 wrote:
Mon Mar 26, 2018 3:01 pm
Tax evasion is illegal, but tax avoidance is perfectly legal.

Again, giving a gift to your parents does not prevent them from giving your kids Christmas presents.
Some legal acts are unethical. If, In fact, this quid pro quo scenario is legal, it might be an example of this. I find your Christmas gift example inapt because it ignores this quid pro quo element.

The OP’s question itself suggests that the idea makes OP at least a little ethically queasy. And the extended discussion of whether the IRS would be in a position to detect someone who acted this way likewise suggests that this is not an ethically clean scenario.
Avoiding taxes is not unethical, and the courts have explicitly said so.
You are again failing to distinguish legality from morality. The courts have decided that there exist legal forms of tax avoidance. This does not allow us to conclude that the OP’s quid pro quo scenario is ethical.

Perhaps we have different ethical set points about what makes us squeamish. If so, that is okay. But the Wikipedia article you linked to does not invalidate my personal judgment that this quid pro quo crosses an ethical line. The OP may or may not share my judgment, but the concerns many have raised provide good reason carefully to consider the possibility that the proposed quid pro quo is bad news.
That's a personal judgment. IMO, when it comes to tax avoidance, if it's legal, it's ethical. I do not feel any ethical obligation to pay one red cent more in taxes than the bare minimum that the law requires.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by golfCaddy » Mon Mar 26, 2018 5:21 pm

This type of quid pro quo seems like a textbook case of tax evasion.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by khh » Mon Mar 26, 2018 10:42 pm

Call the IRS and ask.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by 986racer » Mon Mar 26, 2018 11:12 pm

How is this different than gifting the same stock to a college age student to have him/her sell the stock, pay tuition, and take advantage of the AOTC? As far as I can tell, that strategy (gifting to the student) seems perfectly acceptable. Is the only difference here the fact that even more capital gains can be avoided by gifting it to someone who wouldn't be subject to the kiddie tax?

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by afan » Tue Mar 27, 2018 5:58 am

With all this disagreement about Gill's opinion, I wonder about the qualifications of the people who think he is wrong. Any lawyers, CPA's or enrolled agents who think this is fine? That is, anyone qualified to challenge his reasoning?

Or is this just wishful thinking?
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Gill » Tue Mar 27, 2018 6:12 am

986racer wrote:
Mon Mar 26, 2018 11:12 pm
How is this different than gifting the same stock to a college age student to have him/her sell the stock, pay tuition, and take advantage of the AOTC? As far as I can tell, that strategy (gifting to the student) seems perfectly acceptable. Is the only difference here the fact that even more capital gains can be avoided by gifting it to someone who wouldn't be subject to the kiddie tax?
In your example there is no intermediate step designed as a sham with its only purpose being tax evasion.
Gill

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by JoeRetire » Tue Mar 27, 2018 6:56 am

juno818 wrote:
Sun Mar 25, 2018 7:10 pm
Would this work or would the IRS consider this a sham?
It is a sham.
So how lucky do you feel?

I'm sure if you look hard enough you can find an aggressive CPA who will encourage you to go for it.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by vested1 » Tue Mar 27, 2018 8:38 am

khh wrote:
Mon Mar 26, 2018 10:42 pm
Call the IRS and ask.
This. If it's not illegal or unethical there should be no reason not to call. Be sure to record the call for future use when you're dragged into court by the IRS on tax evasion charges. Oh, and delete this thread. Pay the tuition yourself. Give the gift to help the grandparents. Done.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by friar1610 » Tue Mar 27, 2018 9:06 am

As I've read through this thread the thought occurs to me... If you read in the paper that___________________ (fill in the name of a politician that you particularly dislike) had used this technique to pay for his/her kid's private school tuition, what would your reaction be?
Friar1610

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by 986racer » Tue Mar 27, 2018 10:01 am

Gill wrote:
Tue Mar 27, 2018 6:12 am
986racer wrote:
Mon Mar 26, 2018 11:12 pm
How is this different than gifting the same stock to a college age student to have him/her sell the stock, pay tuition, and take advantage of the AOTC? As far as I can tell, that strategy (gifting to the student) seems perfectly acceptable. Is the only difference here the fact that even more capital gains can be avoided by gifting it to someone who wouldn't be subject to the kiddie tax?
In your example there is no intermediate step designed as a sham with its only purpose being tax evasion.
Gill
I’m not seeing the difference other than the potential amounts that could be avoided.

In the OP example, shares are gifted to someone with no other income, with the understanding (but not a formal agreement) that those shares would be sold and then used to pay for the child’s education. Potential amount of capital gains that could be avoided is roughly $75K (maybe more)

In my example, shares are gifted to the child, with the understanding (but not a formal agreement) that those shares would be sold and then used to pay for the child’s education. Potential amount of capital gains that could be avoided is much more limited due to “kiddie tax” rules but can gain by taking advantage of AOTC. Amount of capital gains avoid is around $16K

To me it looks like the scenarios are very similar.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Gill » Tue Mar 27, 2018 10:09 am

986racer wrote:
Tue Mar 27, 2018 10:01 am
Gill wrote:
Tue Mar 27, 2018 6:12 am
986racer wrote:
Mon Mar 26, 2018 11:12 pm
How is this different than gifting the same stock to a college age student to have him/her sell the stock, pay tuition, and take advantage of the AOTC? As far as I can tell, that strategy (gifting to the student) seems perfectly acceptable. Is the only difference here the fact that even more capital gains can be avoided by gifting it to someone who wouldn't be subject to the kiddie tax?
In your example there is no intermediate step designed as a sham with its only purpose being tax evasion.
Gill
I’m not seeing the difference other than the potential amounts that could be avoided.

In the OP example, shares are gifted to someone with no other income, with the understanding (but not a formal agreement) that those shares would be sold and then used to pay for the child’s education. Potential amount of capital gains that could be avoided is roughly $75K (maybe more)

In my example, shares are gifted to the child, with the understanding (but not a formal agreement) that those shares would be sold and then used to pay for the child’s education. Potential amount of capital gains that could be avoided is much more limited due to “kiddie tax” rules but can gain by taking advantage of AOTC. Amount of capital gains avoid is around $16K

To me it looks like the scenarios are very similar.
The very clear difference is that the "gift" to the parents is not really a gift, but only disguised as a gift with the real purpose of the transaction to pay the donor's child's tuition. The second transaction is a direct gift to the child. The lack of a "formal" agreement is irrelevant. The IRS looks at substance over form. What the Step Transaction Doctrine is saying is that both transactions are essentially identical and therefore the intermediate step of the gift to the parents is to be ignored for tax purposes and treat the transaction for what it really is, i.e., a sale by the parents and a transfer to the child. I'm sorry if you can't see the difference.
Gill

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by MnyGrl » Tue Mar 27, 2018 10:23 am

If I were wealthy and had a parent with little income, I would give him/her monetary gifts that I would allow her to keep. :D

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by afan » Tue Mar 27, 2018 11:42 am

Same question: Are there any knowledgeable people who think this is OK?

Gill is an attorney and, I believe, also a CPA. In other words, he knows what he is talking about.

If some of those who disagree with him can cite their expertise, or applicable law, then we would all be enlightened. Otherwise, it seems we have an answer from the only expert who has bothered to offer an opinion.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by feh » Tue Mar 27, 2018 12:11 pm

Afty wrote:
Mon Mar 26, 2018 11:46 am
Look at the title of this thread: "Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition." It's pretty clear why the gifting is being done.
+1

Is it illegal? I don't know...but it's unethical, IMO.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by CaliJim » Tue Mar 27, 2018 12:18 pm

I don't think the grandparents get a step up in basis for such a gift. http://corporate.findlaw.com/finance/ta ... perty.html
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Jack FFR1846 » Tue Mar 27, 2018 12:32 pm

CaliJim wrote:
Tue Mar 27, 2018 12:18 pm
I don't think the grandparents get a step up in basis for such a gift. http://corporate.findlaw.com/finance/ta ... perty.html
I don't think they're looking for any change in basis. They're using the 0% tax bracket that the grand parents are in to move tax liability from the parents at some non-zero bracket to the grand parents who end up paying no tax.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by afan » Tue Mar 27, 2018 1:36 pm

Can they gift to the child? Acting as guardian, sell the child's stock then use the money to pay the tuition? Does that get around being a step transaction?

Gill? (or anyone else who actually knows what they are talking about)?
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by pshonore » Tue Mar 27, 2018 1:57 pm

afan wrote:
Tue Mar 27, 2018 1:36 pm
Can they gift to the child? Acting as guardian, sell the child's stock then use the money to pay the tuition? Does that get around being a step transaction?

Gill? (or anyone else who actually knows what they are talking about)?
I think in most cases the child would have a "kiddie tax" problem

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by bayview » Tue Mar 27, 2018 2:22 pm

MnyGrl wrote:
Tue Mar 27, 2018 10:23 am
If I were wealthy and had a parent with little income, I would give him/her monetary gifts that I would allow her to keep. :D
That was my immediate thought when I read the beginning of the original post. :D
juno818 wrote:
Sun Mar 25, 2018 7:10 pm
I have a parent with negligible income...
To be fair though, on second reading it does seem that the gift would be a decent amount (no, I can't quantify that or justify the term, lol):
juno818 wrote:
Sun Mar 25, 2018 7:10 pm
My child is also in private K-12 with a tuition of about $20k a year..

I have a parent with negligible income. I would like to gift her up to the annual tax-exclusion limit $15,000 (from me) or $30k(from wife and I) of our appreciated stocks. She will then in turn sell off X amount of the stocks to keep herself at 0% long term capital gain rate. Shen then pays our child's private school tuition...
This does read a bit less jarringly, I guess, especially if the total "gift" is $30K rather than $15K. But I still think the IRS would consider this quid pro quo, with some extra money on the side for Grandma.

disclaimer: I'm in bed on sinus medicine, so I make no claim that this is my most rational and informed thinking...
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Gill » Tue Mar 27, 2018 2:34 pm

pshonore wrote:
Tue Mar 27, 2018 1:57 pm
afan wrote:
Tue Mar 27, 2018 1:36 pm
Can they gift to the child? Acting as guardian, sell the child's stock then use the money to pay the tuition? Does that get around being a step transaction?

Gill? (or anyone else who actually knows what they are talking about)?
I think in most cases the child would have a "kiddie tax" problem
Certainly they can and I, in fact, did this when my daughter was in college. But that was before the Kiddie Tax essentially eliminated most of the benefit of this technique.
Gill

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by juno818 » Tue Mar 27, 2018 2:45 pm

Thanks for all the responses. I guess I should add some more info on the topic.

Perhaps the reason it looks so unethical is because everything is happening in the same year.

The real goal here is to get rid of individual stocks and taxable account capital gains on the $200k by A) taking advantage of the gifting of appreciated assets and B) leveraging the fact the the donee is in a low tax bracket. Whether or not she pays the tuition is secondary. She can in turn do whatever she wants with the gifted assets. She will manage it on her own without our supervision. She can put it all in all low cost index fund, use some for daily expenses, pay her insurances, etc...

Is there not an ethical and legal way to somehow realize some of that money back? What if she waited 8-10 years and she voluntarily on her own will decided to pay the grandchild's high school or college tuition. Slowly gifted grandchildren some money during holidays, etc...

Is this tax evasion or tax avoidance? Still unethical?

I guess the reason why it seems unethical is because the original post makes it seem like I am in control of the entire process. If the grandparent were the one making the decisions and managing her money it would be less so - IMO.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by feh » Tue Mar 27, 2018 3:00 pm

juno818 wrote:
Tue Mar 27, 2018 2:45 pm
Is this tax evasion or tax avoidance? Still unethical?
Obviously, my opinion only...

If there is an expectation that the gift will someday (whether next month or 10 years from now) come back to benefit you or your dependents, it is unethical.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by FreemanB » Tue Mar 27, 2018 3:06 pm

juno818 wrote:
Tue Mar 27, 2018 2:45 pm
Is this tax evasion or tax avoidance? Still unethical?
The key is whether it is a quid pro quo arrangement. If they did not pay the tuition, would you still give them the gift? If the answer is no, then it isn't a gift, and the transaction is unethical and tax evasion. Increasing the time between the transactions would reduce the chances of the two transactions being noticed by the IRS. However, the reason it looks so unethical isn't due to the timing of the transactions. It is because the title of your post is "Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition", which explicitly says that this the "gift" isn't really a gift, no matter what you call it, due to the expectation that you will get most(If not all) of the funds back without having to pay taxes on the gains. You even mention that neither transaction requires filing with the IRS. If you truly believed this was a valid course of action, why would that be an issue?

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by MnyGrl » Tue Mar 27, 2018 3:13 pm

If I were to do something that is illegal I would work hard to keep any relatives out of it. If robbing a bank, I wouldn’t ask my mom to drive the getaway car. I don’t know what your relationship is like with your mom, but as a mother if one of my kids asked me to do something like this, I would feel very hurt and used.

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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by juno818 » Tue Mar 27, 2018 3:30 pm

feh wrote:
Tue Mar 27, 2018 3:00 pm
juno818 wrote:
Tue Mar 27, 2018 2:45 pm
Is this tax evasion or tax avoidance? Still unethical?
Obviously, my opinion only...

If there is an expectation that the gift will someday (whether next month or 10 years from now) come back to benefit you or your dependents, it is unethical.
If I were to gift my son $15k for college tuition with the expectation that he pay me back someday or take care of me in retirement, is this unethical? Let's take it a step further, If my mother gifted me some money and told me to invest it so I can pay for her grandchild's college tuition with the expectation that one day she will get that money back, is it unethical?

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