Gift Tax Issue

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Buffetologist
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Gift Tax Issue

Post by Buffetologist »

My wife and I (60 and 57) are considering giving our daughter a $250K gift for a down payment on a house in the $800K range. We'd also have to give our other daughter the same amount to be fair. We think our net worth is sufficient that there is a 75% chance that we will die above the estate tax threshold and we live in Massachusetts, so for arguments sake, assume an estate tax of 56% if we're at least $1M over the threshold.

We have been, and plan to continue to make the maximum exclusion in gifts every year, (currently $32,000 per child split between my wife and I).

Since we're already excluding the maximum amount every year anyway, is there any drawback to giving this gift now and filing 709s, since if we die above the estate tax threshold the estate would be subject to estate tax anyway, then the reduction in unified credit caused by these gifts would have had no net effect.

In other words, I think the net effect of this gift reducing our unified credit doesn't change the amount our estate would exceed the limit anyway because the size of the unified credit and the size of our gross estate would both have been reduced by the amount of the large gift, and we're not going to waste any space in the annual exclusion anyway.

Am I thinking about this correctly?

Thanks in advance.
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willthrill81
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Re: Gift Tax Issue

Post by willthrill81 »

Yes, the amount that you gift above the $16k limit per giver will be subtracted from your estate tax exclusion maximum when you pass. That seems to me like the simplest way to achieve what you want.
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Re: Gift Tax Issue

Post by Gill »

Your understanding is correct. As long as you are maximizing annual exclusion gifts every year, gifts beyond that will serve to reduce your unified credit.
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Re: Gift Tax Issue

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123
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Re: Gift Tax Issue

Post by 123 »

Buffetologist wrote: Sun May 08, 2022 9:54 am My wife and I (60 and 57) are considering giving our daughter a $250K gift for a down payment on a house in the $800K range. We'd also have to give our other daughter the same amount to be fair...
While it would seem your daughters will receive the funds eventually anyway you may be encouraging your daughter to live beyond her means if she cannot otherwise afford an $800K house. Sometimes parental gifts and support can prevent a child from ever being able to feel that they are a self-sufficient independent adult. Parents throwing money at children can give the child the sense that the parent believes the child can't accomplish things on their own.
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FoolMeOnce
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Re: Gift Tax Issue

Post by FoolMeOnce »

Buffetologist wrote: Sun May 08, 2022 9:54 am We have been, and plan to continue to make the maximum exclusion in gifts every year, (currently $32,000 per child split between my wife and I).
If the child is buying the house with a partner, and if your are comfortable doing it, you can double the exclusion by also gifting to the partner. Maybe not forever, but for this one year that it is going to a joint down payment anyway.
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Buffetologist
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Re: Gift Tax Issue

Post by Buffetologist »

123 wrote: Sun May 08, 2022 12:35 pm
Buffetologist wrote: Sun May 08, 2022 9:54 am My wife and I (60 and 57) are considering giving our daughter a $250K gift for a down payment on a house in the $800K range. We'd also have to give our other daughter the same amount to be fair...
While it would seem your daughters will receive the funds eventually anyway you may be encouraging your daughter to live beyond her means if she cannot otherwise afford an $800K house. Sometimes parental gifts and support can prevent a child from ever being able to feel that they are a self-sufficient independent adult. Parents throwing money at children can give the child the sense that the parent believes the child can't accomplish things on their own.
Thanks. I agree with you in general. However, in the current housing situation, it's more about competing to actually get the house.

Our daughter is a successful, self-sufficient, highly paid tech professional. She can "afford" the house without us. With our help, she can make a much more competitive offer with a large downpayment without liquidating her taxable equity mutual fund portfolio and without borrowing from her 401K. In her market, offers with 10% down and a mortgage contingency and the risk of an appraisal gap are not getting accepted on the more desirable houses because they are not competitive with the multiple offers these homes get. We're in a position to back up her cash offers with a mortgage of our own should that be necessary, but we think the risk of not getting a mortgage approved with such a large downpayment is small because the large down payment mitigates any low appraisal. She'll be pre-approved for the mortgage.
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JazzTime
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Re: Gift Tax Issue

Post by JazzTime »

I'm not sure if this helps, but an alternative would be to loan your daughter the $250K, then forgive $32K of the loan each year until it is completely forgiven. You can write a one page simple loan agreement with, say, an eight year term. The only requirement is that you must charge the current IRS required minimum interest (AFR). Then simply write a letter each year informing your daughter that you have gifted her $32K and applied the amount to the loan balance per her request.
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Buffetologist
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Re: Gift Tax Issue

Post by Buffetologist »

JazzTime wrote: Thu May 12, 2022 8:40 am I'm not sure if this helps, but an alternative would be to loan your daughter the $250K, then forgive $32K of the loan each year until it is completely forgiven. You can write a one page simple loan agreement with, say, an eight year term. The only requirement is that you must charge the current IRS required minimum interest (AFR). Then simply write a letter each year informing your daughter that you have gifted her $32K and applied the amount to the loan balance per her request.
Thanks, I actually looked into this initially, and tried to enlist some professional help from a lawyer and then an accountant, and then a mortgage originator, but I didn't get the same answer twice, and got a lot of advice that seemed sketchy.
Estate Attorney: Ask the accountant.
Accountant: IRS is so busy they wouldn't notice, but if you want, I can help you fill out the forms.
Mortgage professional: Put the money in her account, wait 2 statements, and nobody will ask.
It's a felony to lie on a mortgage application and my daughter isn't going to do it.

I read this article
https://www.nolo.com/legal-encyclopedia ... er9-4.html
where there was an actual tax case of someone who tried to do this for less money and the tax court ruled that it was a gift, and to make matters worse the annual gift tax exclusion that they thought they were using wasn't because the court ruled that the original payment was a gift not a loan and thus there was nothing to exclude.

While there seem to be things one can do to make this likely to work, the biggest problem is that I wouldn't know for sure if I would be successful until I'm dead.

My wife and I figured that as long as we give the maximum excusable gifts every year, then it would be a wash (threshold and estate drop by same amount), and if we couldn't afford to do that than it would be because something went really wrong (like needing to pay for long-term care, hyperinflation, war, etc) and we're under whatever the threshold is when we find we can no longer afford it. The other problem is that if one of us dies, the exclusion goes down to $16K and would take longer to pay off the loan.
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Re: Gift Tax Issue

Post by Lee_WSP »

JazzTime wrote: Thu May 12, 2022 8:40 am I'm not sure if this helps, but an alternative would be to loan your daughter the $250K, then forgive $32K of the loan each year until it is completely forgiven. You can write a one page simple loan agreement with, say, an eight year term. The only requirement is that you must charge the current IRS required minimum interest (AFR). Then simply write a letter each year informing your daughter that you have gifted her $32K and applied the amount to the loan balance per her request.
A loan would negatively impact the borrower's DTI ratio.

If OP indicates in writing at any point in time that the loan is in fact a gift, then the "loan" was in fact a gift and the entire structure will be deemed a step transaction. Penalties may be imposed.

Such a scheme would work fine if OP was fronting the entire cost or half the cost or some such that DTI isn't a concern, but given the need for the gift in the first place, DTI is a concern.
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Lee_WSP
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Re: Gift Tax Issue

Post by Lee_WSP »

Buffetologist wrote: Sun May 08, 2022 9:54 am
Am I thinking about this correctly?

Thanks in advance.
Yes. Just be sure to gift an identical amount to your other children so they don't feel put off. It's not something you want to take care of in your estate plan as the valuation of that gift today is going to change dramatically the longer you live from when you made the gift.
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Re: Gift Tax Issue

Post by DSBH »

Buffetologist wrote: Sun May 08, 2022 9:54 am My wife and I (60 and 57) are considering giving our daughter a $250K gift for a down payment on a house in the $800K range. We'd also have to give our other daughter the same amount to be fair. We think our net worth is sufficient that there is a 75% chance that we will die above the estate tax threshold and we live in Massachusetts, so for arguments sake, assume an estate tax of 56% if we're at least $1M over the threshold.

We have been, and plan to continue to make the maximum exclusion in gifts every year, (currently $32,000 per child split between my wife and I).
...
We're looking at a similar situation, and decided to offer an intra-family loan to our daughter using National Family Mortgage - https://www.nationalfamilymortgage.com/afr-rates/ - as the current long-term AFR rate is 2.66%, almost half of the market rate. We'll be "earning" interest at a rate of 2.66% and she'll be "paying" a discounted rate.

We have read several threads on mixing (or not) family and money, and decided that we're comfortable offering family mortgage loan, and also continue to gift the maximum yearly exclusion amount equally to each heir.
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Buffetologist
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Re: Gift Tax Issue

Post by Buffetologist »

DSBH wrote: Fri May 13, 2022 10:16 am
Buffetologist wrote: Sun May 08, 2022 9:54 am My wife and I (60 and 57) are considering giving our daughter a $250K gift for a down payment on a house in the $800K range. We'd also have to give our other daughter the same amount to be fair. We think our net worth is sufficient that there is a 75% chance that we will die above the estate tax threshold and we live in Massachusetts, so for arguments sake, assume an estate tax of 56% if we're at least $1M over the threshold.

We have been, and plan to continue to make the maximum exclusion in gifts every year, (currently $32,000 per child split between my wife and I).
...
We're looking at a similar situation, and decided to offer an intra-family loan to our daughter using National Family Mortgage - https://www.nationalfamilymortgage.com/afr-rates/ - as the current long-term AFR rate is 2.66%, almost half of the market rate. We'll be "earning" interest at a rate of 2.66% and she'll be "paying" a discounted rate.

We have read several threads on mixing (or not) family and money, and decided that we're comfortable offering family mortgage loan, and also continue to gift the maximum yearly exclusion amount equally to each heir.
That's a nice resource. Thanks.

So if you will continue to gift the maximum exclusion, why did you conclude that this advantageous? You will still pay 1) the setup and maintenance costs, and 2) the difference between yours and her tax rates on the mortgage interest.
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Re: Gift Tax Issue

Post by DSBH »

Buffetologist wrote: Fri May 13, 2022 1:02 pm
DSBH wrote: Fri May 13, 2022 10:16 am
Buffetologist wrote: Sun May 08, 2022 9:54 am My wife and I (60 and 57) are considering giving our daughter a $250K gift for a down payment on a house in the $800K range. We'd also have to give our other daughter the same amount to be fair. We think our net worth is sufficient that there is a 75% chance that we will die above the estate tax threshold and we live in Massachusetts, so for arguments sake, assume an estate tax of 56% if we're at least $1M over the threshold.

We have been, and plan to continue to make the maximum exclusion in gifts every year, (currently $32,000 per child split between my wife and I).
...
We're looking at a similar situation, and decided to offer an intra-family loan to our daughter using National Family Mortgage - https://www.nationalfamilymortgage.com/afr-rates/ - as the current long-term AFR rate is 2.66%, almost half of the market rate. We'll be "earning" interest at a rate of 2.66% and she'll be "paying" a discounted rate.

We have read several threads on mixing (or not) family and money, and decided that we're comfortable offering family mortgage loan, and also continue to gift the maximum yearly exclusion amount equally to each heir.
That's a nice resource. Thanks.

So if you will continue to gift the maximum exclusion, why did you conclude that this advantageous? You will still pay 1) the setup and maintenance costs, and 2) the difference between yours and her tax rates on the mortgage interest.
The gift remains the same regardless of loan or no loan. We estimated that the net benefit is better for us and our daughter combined, and our increased cost is quite less than her having to pay 5.25% in mortgage interest. All assumptions for the estimation not withstanding, any increased cost for us will simply be regarded as additional gift.
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