Early inheritance???

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imac
Posts: 6
Joined: Mon Jan 03, 2011 3:38 pm

Early inheritance???

Post by imac »

The scenario is as follows: I will be given over 100,000 by a living parent soon (for those curious.. I will pay off my current residence and yes i feel very blessed) I'm aware of the max gift allowance per year. Now, the giver is certain that the money can be "deducted" from any future inheritance that I may receive and i don't have to pay taxes on the money now as long as we stay under the current max amount set by inheritance tax laws. We (me and the giver) will sign a document with copies of the check stating what is occurring and the document will be dated (so whoever can look back and see what the max inheritance amount was at the time... ) So, is there some loophole I'm missing? Is this ok?
chicagobear
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Post by chicagobear »

The giver needs to fill out a gift tax form for the IRS. No tax is due for gifts under $5 million, but the government tracks how much has been given.
ataloss
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Post by ataloss »

Below are some of the more common questions and answers about Gift Tax issues. The laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code. For further guidance, we strongly recommend that you visit with an estate tax practitioner (Attorney or CPA) who has considerable experience in this field.
from the irs web site. In this case rather than just making things up wouldn't you want to consult a professional?
Topic Author
imac
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Joined: Mon Jan 03, 2011 3:38 pm

Thanks

Post by imac »

Thanks, simple enough I suppose. Now, will the government base the max amount allowed (5 million now) on the law at the time of receipt or at the time of death being years later. What if the max has changed to 1 million down the road...
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dave.d
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Post by dave.d »

I'm no expert, and don't know all the relevant technical terms, but that sounds correct to me in principle. The giver will have to file a gift tax return this year, but can avoid any actual tax by declaring the use of part of what used to be called the unified credit (so called because it could be used for either gift or estate taxes, but not both). A corresponding portion of the giver's estate will become subject to estate taxes when the time comes, IF the total estate then exceeds the relevant limit (now $5 million).

The gift thus passes through a keyhole of finite size, now before it grows larger by investment returns. But of course the purpose of the gift may have nothing to do with avoiding estate taxes; it may just be that the tax rules won't interfere with the giver's purpose. I have no clue what happens if the $5m limit changes.

The one angle that I feel unclear on is the potential interaction between a gift like this and the way an estate can allow a surviving spouse the income from assets for life without adverse tax consequences. Can you describe whether the giver is (still?) married to your other parent, or someone else, and generally what you understand their estate intentions to be, if you know?

EDIT: This may answer my uncertainty: http://www.bogleheads.org/forum/viewtop ... 1306629922
Value-based allocation.
JW-Retired
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Post by JW-Retired »

imac wrote:Now, the giver is certain that the money can be "deducted" from any future inheritance that I may receive and i don't have to pay taxes on the money now as long as we stay under the current max amount set by inheritance tax laws. We (me and the giver) will sign a document with copies of the check stating what is occurring and the document will be dated (so whoever can look back and see what the max inheritance amount was at the time... ) So, is there some loophole I'm missing? Is this ok?
You sure don't have to pay taxes now. The person making the gift pays the tax, if any, not the recipient. Your parent must file a gift tax return. If the gift exeeds $13000 then the excess will count against the givers estate tax credit when they pass on. If you are the heir then that could effect what you inherit because the gift amount gets added back to the estate. I don't know how the current $5M tax credit versus some later different amount might be combined. If it's only $100K, it shouldn't make much difference anyway.

Get legal advice if you need to know exactly.
JW
flowerbuyer
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Post by flowerbuyer »

I'm not an expert, but am in a similar situation.... my parent gifting $200,000 to each of two children. My understanding is that the unified estate/gift tax exemption now is $5,000,000. But it reverts back to $1,000,000 after 2012.
So, even if it would be added back in, and you would have to pay estate tax if the exemption is $1,000,000 at time of death, at least the appreciation or gain on the amount gifted would not be included.
Alan S.
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Post by Alan S. »

In the past the taxable gift is added back to the estate, but if we have a major reduction in the unified credit, there is going to be a problem collecting the estate tax in many cases.

Example: Estate attorneys are recommending that wealthy people take advantage of the 5mm exemption to make huge gifts prior to 2013. If a person gifts 5mm, then ends up in a nursing home and we have another market crash, assume he is worth 250,000 at death. If the unified credit has dropped to 1mm, then his taxable estate is 5.25mm and the 250,000 will only pay a fraction of the estate tax due.

If there is any major reduction in the credit, the donor might be wise to consider that a large current gift could eliminate other heirs from receiving a nickel when the donor passes.

Add to that the increasing trend for state unified credits to be set much below the federal level.
bluemarlin08
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Post by bluemarlin08 »

Example: Estate attorneys are recommending that wealthy people take advantage of the 5mm exemption to make huge gifts prior to 2013. If a person gifts 5mm, then ends up in a nursing home and we have another market crash, assume he is worth 250,000 at death. If the unified credit has dropped to 1mm, then his taxable estate is 5.25mm and the 250,000 will only pay a fraction of the estate tax due.

Depends on when he dies in relation to when he made the gift. If he dies 3 years after the gift, the gift is not included in his estate. That is how I understand it to work.
Uninvested
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Post by Uninvested »

I suggest having your father write the check directly for the payoff. Assuming his estate is less than 5 MM, there would be no gift tax due anyway. Then he doesn't even need to file. There is nothing to penalize and it is a big waste of time.
harrylime
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Post by harrylime »

Uninvested wrote:I suggest having your father write the check directly for the payoff. Assuming his estate is less than 5 MM, there would be no gift tax due anyway. Then he doesn't even need to file. There is nothing to penalize and it is a big waste of time.
I betcha that the IRS would have a slightly different opinion.
Uninvested
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Post by Uninvested »

How the heck would the IRS possibly know? And if they somehow came across this, which I cannot conceive, the OP would use the Geithner, current HHS secretary and Rangel defense--I didn't know. But here, there is no tax due at all so nothing to pay back unlike Turbo Cheat Geithner, the HHS secretary and Cheating Charlie.
harrylime
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Post by harrylime »

Uninvested wrote:How the heck would the IRS possibly know?
Well, if you are advocating ignoring tax law completely, that's a different matter...

(By the way, the IRS is trying its hardest to figure out how to catch gift tax reporting non-compliance.)
Leesbro63
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Post by Leesbro63 »

You're all also missing the fact that the first $13,000 ($26,000 if to a couple) is part of the annual gift exemption anyway. So the amount to report as a gift is $100,000 minus that amount. If there's a mom AND a wife involved, you could have $46,000 under the annual exemption. And if you do that now and another $46,000 on Jan 1st you've got it pretty well covered with any filing required. (The remaining $8000 would technically require filing of a gift tax return.)
ataloss
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Post by ataloss »

You're all also missing the fact that the first $13,000 ($26,000 if to a couple) is part of the annual gift exemption anyway. So the amount to report as a gift is $100,000 minus that amount. If there's a mom AND a wife involved, you could have $46,000 under the annual exemption. And if you do that now and another $46,000 on Jan 1st you've got it pretty well covered with any filing required. (The remaining $8000 would technically require filing of a gift tax return.)
I don't think we are all missing that point and there are better ways to structure the gift than what the op had suggested but I am not sure if the intent is to follow the law or just to do something that seems reasonable and attach notes explaining it and hope not to be caught. :wink:
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