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

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

Post by Gill » Wed Mar 28, 2018 2:52 pm

oldfatguy wrote:
Wed Mar 28, 2018 2:24 pm
libralibra wrote:
Wed Mar 28, 2018 1:21 pm
Kitces wrote an entire article about gifting shares to pay for college and avoid taxes, and no one seemed to bat an eye. https://www.kitces.com/blog/liquidate-a ... iddie-tax/ The only difference was that the gift was to the child, not grandparent, but was still solely for the purpose of paying for school.
Gifting someone is not the problem. Gifting someone with the expectation of the money being funneled back to you, in order to avoid taxes, is the problem.
I believe this is the 101st post on this thread and that message still hasn't been accepted by some. Quite simply, the IRS looks at substance over form and the substance of the proposed transaction is that OP is selling the stock to pay for his child's education and therefore the sale is taxed to him in spite of going through the charade of having a grandparent sell it and then transfer the proceeds to the child. There is no other reason to make the transfer to the grandparent other than to use the lower tax bracket and therefore the IRS will ignore this step under the Step Transaction Doctrine. I'm sure everyone else is tired of hearing me make the same comment. :happy
Gill

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

Post by libralibra » Wed Mar 28, 2018 3:11 pm

Gill wrote:
Wed Mar 28, 2018 2:52 pm
oldfatguy wrote:
Wed Mar 28, 2018 2:24 pm
libralibra wrote:
Wed Mar 28, 2018 1:21 pm
Kitces wrote an entire article about gifting shares to pay for college and avoid taxes, and no one seemed to bat an eye. https://www.kitces.com/blog/liquidate-a ... iddie-tax/ The only difference was that the gift was to the child, not grandparent, but was still solely for the purpose of paying for school.
Gifting someone is not the problem. Gifting someone with the expectation of the money being funneled back to you, in order to avoid taxes, is the problem.
I believe this is the 101st post on this thread and that message still hasn't been accepted by some. Quite simply, the IRS looks at substance over form and the substance of the proposed transaction is that OP is selling the stock to pay for his child's education and therefore the sale is taxed to him in spite of going through the charade of having a grandparent sell it and then transfer the proceeds to the child. There is no other reason to make the transfer to the grandparent other than to use the lower tax bracket and therefore the IRS will ignore this step under the Step Transaction Doctrine. I'm sure everyone else is tired of hearing me make the same comment. :happy
Gill
Which is exactly what Kitces is proposing - gift shares to student, student sells at lower tax rate, then uses the money to pay for school. It's exactly the same steps as the grandparents case, so if the step transaction doctrine applies, it would apply equally to both cases since the end result is the same: parents unloaded the stock and paid the tuition.

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

Post by oldfatguy » Wed Mar 28, 2018 3:18 pm

libralibra wrote:
Wed Mar 28, 2018 3:11 pm

Which is exactly what Kitces is proposing - gift shares to student, student sells at lower tax rate, then uses the money to pay for school. It's exactly the same steps as the grandparents case, so if the step transaction doctrine applies, it would apply equally to both cases since the end result is the same: parents unloaded the stock and paid the tuition.
The OP's scenarios is not the same at all. OP wants to gift money to a parent, and then have the parent pay for an expense that the OP owes.

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

Post by Gill » Wed Mar 28, 2018 3:28 pm

oldfatguy wrote:
Wed Mar 28, 2018 3:18 pm
libralibra wrote:
Wed Mar 28, 2018 3:11 pm

Which is exactly what Kitces is proposing - gift shares to student, student sells at lower tax rate, then uses the money to pay for school. It's exactly the same steps as the grandparents case, so if the step transaction doctrine applies, it would apply equally to both cases since the end result is the same: parents unloaded the stock and paid the tuition.
The OP's scenarios is not the same at all. OP wants to gift money to a parent, and then have the parent pay for an expense that the OP owes.
Thank you, oldfatguy.
Gill

sc9182
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by sc9182 » Wed Mar 28, 2018 4:04 pm

oldfatguy wrote:
Wed Mar 28, 2018 3:18 pm
libralibra wrote:
Wed Mar 28, 2018 3:11 pm

Which is exactly what Kitces is proposing - gift shares to student, student sells at lower tax rate, then uses the money to pay for school. It's exactly the same steps as the grandparents case, so if the step transaction doctrine applies, it would apply equally to both cases since the end result is the same: parents unloaded the stock and paid the tuition.
The OP's scenarios is not the same at all. OP wants to gift money to a parent, and then have the parent pay for an expense that the OP owes.
Its the Student/Kid who owes the tuition, most likely who is an adult - not necessarily OP who owes the tuition. As for the step transaction suggestion - wondering if there are specific guidelines in scenario like this - or is it just a "catch-all" filter ?

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

Post by libralibra » Wed Mar 28, 2018 4:10 pm

Gill wrote:
Wed Mar 28, 2018 3:28 pm
oldfatguy wrote:
Wed Mar 28, 2018 3:18 pm
libralibra wrote:
Wed Mar 28, 2018 3:11 pm

Which is exactly what Kitces is proposing - gift shares to student, student sells at lower tax rate, then uses the money to pay for school. It's exactly the same steps as the grandparents case, so if the step transaction doctrine applies, it would apply equally to both cases since the end result is the same: parents unloaded the stock and paid the tuition.
The OP's scenarios is not the same at all. OP wants to gift money to a parent, and then have the parent pay for an expense that the OP owes.
Thank you, oldfatguy.
Gill
You guys may not fully understand what the step transaction doctrine is really saying. It has nothing to do with who's paying for whom. It simply states that you can't have a series of steps that is only intended to avoid taxes. (E.g. seems like if the parent wanted to pay the grandparent's CC debt and gave them stock to sell instead of cash, even that would fall under its umbrella.)

Anyway, I have no idea which is right, but I'm just pointing out that the kitces article has the same steps and intent as the OP - and the end result is the same - and yet no one seems to think it was a step transaction.

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

Post by oldfatguy » Wed Mar 28, 2018 4:10 pm

sc9182 wrote:
Wed Mar 28, 2018 4:04 pm
oldfatguy wrote:
Wed Mar 28, 2018 3:18 pm
libralibra wrote:
Wed Mar 28, 2018 3:11 pm

Which is exactly what Kitces is proposing - gift shares to student, student sells at lower tax rate, then uses the money to pay for school. It's exactly the same steps as the grandparents case, so if the step transaction doctrine applies, it would apply equally to both cases since the end result is the same: parents unloaded the stock and paid the tuition.
The OP's scenarios is not the same at all. OP wants to gift money to a parent, and then have the parent pay for an expense that the OP owes.
Its the Student/Kid who owes the tuition, most likely who is an adult - not necessarily OP who owes the tuition. As for the step transaction suggestion - wondering if there are specific guidelines in scenario like this - or is it just a "catch-all" filter ?
The OP is talking about K-12 tuition for his kids, not college.

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

Post by MnyGrl » Wed Mar 28, 2018 4:21 pm

Gill wrote:
Wed Mar 28, 2018 2:52 pm
oldfatguy wrote:
Wed Mar 28, 2018 2:24 pm
libralibra wrote:
Wed Mar 28, 2018 1:21 pm
Kitces wrote an entire article about gifting shares to pay for college and avoid taxes, and no one seemed to bat an eye. https://www.kitces.com/blog/liquidate-a ... iddie-tax/ The only difference was that the gift was to the child, not grandparent, but was still solely for the purpose of paying for school.
Gifting someone is not the problem. Gifting someone with the expectation of the money being funneled back to you, in order to avoid taxes, is the problem.
I believe this is the 101st post on this thread and that message still hasn't been accepted by some. Quite simply, the IRS looks at substance over form and the substance of the proposed transaction is that OP is selling the stock to pay for his child's education and therefore the sale is taxed to him in spite of going through the charade of having a grandparent sell it and then transfer the proceeds to the child. There is no other reason to make the transfer to the grandparent other than to use the lower tax bracket and therefore the IRS will ignore this step under the Step Transaction Doctrine. I'm sure everyone else is tired of hearing me make the same comment. :happy
Gill
Thanks for trying, Gill! :happy

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

Post by TIAX » Wed Mar 28, 2018 5:44 pm

MnyGrl wrote:
Wed Mar 28, 2018 4:21 pm
Gill wrote:
Wed Mar 28, 2018 2:52 pm
I believe this is the 101st post on this thread and that message still hasn't been accepted by some. Quite simply, the IRS looks at substance over form and the substance of the proposed transaction is that OP is selling the stock to pay for his child's education and therefore the sale is taxed to him in spite of going through the charade of having a grandparent sell it and then transfer the proceeds to the child. There is no other reason to make the transfer to the grandparent other than to use the lower tax bracket and therefore the IRS will ignore this step under the Step Transaction Doctrine. I'm sure everyone else is tired of hearing me make the same comment. :happy
Gill
Thanks for trying, Gill! :happy
Thanks Gill. I'm really glad it's clear that this is substance over form. From the Sixth Circuit's Summa Holdings decision last year:
Each word of the “substance-over-form doctrine,” at least as the Commissioner has used
it here, should give pause. If the government can undo transactions that the terms of the Code
expressly authorize, it’s fair to ask what the point of making these terms accessible to the
taxpayer and binding on the tax collector is. “Form” is “substance” when it comes to law. The
words of law (its form) determine content (its substance). How odd, then, to permit the tax
collector to reverse the sequence—to allow him to determine the substance of a law and to make
it govern “over” the written form of the law—and to call it a “doctrine” no less.
As it turns out, the Commissioner does not have such sweeping authority. And neither do we.
Were you sure using the DISC and Roth IRAs would be considered substance over form?

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

Post by Gill » Wed Mar 28, 2018 6:24 pm

TIAX wrote:
Wed Mar 28, 2018 5:44 pm
MnyGrl wrote:
Wed Mar 28, 2018 4:21 pm
Gill wrote:
Wed Mar 28, 2018 2:52 pm
I believe this is the 101st post on this thread and that message still hasn't been accepted by some. Quite simply, the IRS looks at substance over form and the substance of the proposed transaction is that OP is selling the stock to pay for his child's education and therefore the sale is taxed to him in spite of going through the charade of having a grandparent sell it and then transfer the proceeds to the child. There is no other reason to make the transfer to the grandparent other than to use the lower tax bracket and therefore the IRS will ignore this step under the Step Transaction Doctrine. I'm sure everyone else is tired of hearing me make the same comment. :happy
Gill
Thanks for trying, Gill! :happy
Thanks Gill. I'm really glad it's clear that this is substance over form. From the Sixth Circuit's Summa Holdings decision last year:
Each word of the “substance-over-form doctrine,” at least as the Commissioner has used
it here, should give pause. If the government can undo transactions that the terms of the Code
expressly authorize, it’s fair to ask what the point of making these terms accessible to the
taxpayer and binding on the tax collector is. “Form” is “substance” when it comes to law. The
words of law (its form) determine content (its substance). How odd, then, to permit the tax
collector to reverse the sequence—to allow him to determine the substance of a law and to make
it govern “over” the written form of the law—and to call it a “doctrine” no less.
As it turns out, the Commissioner does not have such sweeping authority. And neither do we.
Were you sure using the DISC and Roth IRAs would be considered substance over form?
The Step Transaction Doctrine has been the basis for my conclusion throughout this entire discussion. This doctrine does not rely on substance over form but is in addition to that doctrine. The dicta of the Sixth Circuit is irrelevant to this situation.
Gill

986racer
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by 986racer » Wed Mar 28, 2018 8:54 pm

libralibra wrote:
Wed Mar 28, 2018 4:10 pm
You guys may not fully understand what the step transaction doctrine is really saying. It has nothing to do with who's paying for whom. It simply states that you can't have a series of steps that is only intended to avoid taxes. (E.g. seems like if the parent wanted to pay the grandparent's CC debt and gave them stock to sell instead of cash, even that would fall under its umbrella.)
That seems a bit ludicrous of the example of paying of the grandparent's CC debt. Basically, that makes it sound like any gift of appreciated stock must be some kind of tax evasion as the donor could simply sell the shares themselves and provide cash instead.

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

Post by libralibra » Wed Mar 28, 2018 10:57 pm

Yep, totally agree. It illustrates my point that whenever someone pulls out the "it's obviously a step transaction!" argument as if it's decided law, I have to question why they are also so sure similar cases don't seem to qualify (hopefully it's not just "gut feeling"). If someone could cite some actual cases of both positive and negative IRS decisions, then we could at least begin to feel around the edges and figure out the boundaries. (google was no help in that only complicated cases involving businesses and LLCs seem to come up.)

Anyway, if OP trusts the experts here that say gifting to the grandparent is not ok, but gifting to the child is, then they could still recognize $4700 LTCG tax free by gifting the shares to the child to sell. After that it's the same 15%, except that they might at least save the 3.8% Obamacare tax. But don't exceed 14.8k LTCG, which hits 23.8%. OP must have some basis in the shares, so it won't take 20k LTCG to pay the 20k tuition.

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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 » Thu Mar 29, 2018 11:24 am

TIAX wrote:
Wed Mar 28, 2018 7:36 am
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.
Just like it was clear with backdoor Roths?
TIAX wrote:
Wed Mar 28, 2018 1:39 pm
Judge Learned Hand on this issue:
There is not the faintest ground for imputing any such purpose to the parties at bar; and, if there were, it ought not to count. Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
:thumbsup

I too wonder whether many here think that backdoor Roths are (1) legal since they superficially seem to violate the amorphous 'step doctrine' and, consequently, (2) ethical.
986racer wrote:
Wed Mar 28, 2018 8:54 pm
libralibra wrote:
Wed Mar 28, 2018 4:10 pm
You guys may not fully understand what the step transaction doctrine is really saying. It has nothing to do with who's paying for whom. It simply states that you can't have a series of steps that is only intended to avoid taxes. (E.g. seems like if the parent wanted to pay the grandparent's CC debt and gave them stock to sell instead of cash, even that would fall under its umbrella.)
That seems a bit ludicrous of the example of paying of the grandparent's CC debt. Basically, that makes it sound like any gift of appreciated stock must be some kind of tax evasion as the donor could simply sell the shares themselves and provide cash instead.
Based on the explanations provided by those against this, they wouldn't have a problem with this approach (i.e. gifting stock to grandparents, grandparents later pay grandchildren's tuition) if there was no 'agreement' in place for it to occur. If this process happened without an a priori understanding, it seems like no one here would have a problem with it.
“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

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

Post by PhilosophyAndrew » Thu Mar 29, 2018 11:51 am

willthrill81 wrote:
Thu Mar 29, 2018 11:24 am
Based on the explanations provided by those against this, they wouldn't have a problem with this approach (i.e. gifting stock to grandparents, grandparents later pay grandchildren's tuition) if there was no 'agreement' in place for it to occur. If this process happened without an a priori understanding, it seems like no one here would have a problem with it.
This is how I view it — a quid pro quo agreement strikes me as crossing the line between tax avoidance and tax evasion.

I personally wouldn’t do this based on my own ethical assessment r, and it seems prudent for those who don’t believe the quid pro quo arrangement is unethical to check its legality with a relevant expert.

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

Post by Minty » Thu Mar 29, 2018 12:00 pm

Whether or not the step transaction doctrine applies, I have grave doubts that this arrangement would constitute a bona fide gift. I did a little research; this article is on point. Question whether gift is valid, or a mere sham, as regards income tax of donor, 125 A.L.R. 779 (1940 & current supplement). One of the cases cited leads to this case: "A transfer does not, then constitute a gift for deductible purposes if it is made 'in expectation of the receipt of certain specific direct economic benefits within the power of the recipient to bestow directly or indirectly, which otherwise might not be forthcoming.'” Dowell v. United States, 553 F.2d 1233, 1238 (10th Cir. 1977) (quoting Stubbs v. United States, 428 F.2d 885, 887 (9th Cir. 1970)). Different underlying factual situations, but the principle is the same.

As a logical matter, if this strategy were legal, there would be no need for 529 plans. Appreciated securities could be donated to schools or kids on condition that they be used for tuition.
Core Four with nominal bonds and TIPS.

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

Post by Pigeye Brewster » Thu Mar 29, 2018 12:20 pm

Minty wrote:
Thu Mar 29, 2018 12:00 pm
Appreciated securities could be donated to schools ... on condition that they be used for tuition.
And this is clearly not allowed.

Per IRS Publication 526:
The contributions must be made to a qualified
organization and not set aside for use by a
specific person.

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

Post by Minty » Thu Mar 29, 2018 5:48 pm

Pigeye Brewster wrote:
Thu Mar 29, 2018 12:20 pm
Minty wrote:
Thu Mar 29, 2018 12:00 pm
Appreciated securities could be donated to schools ... on condition that they be used for tuition.
And this is clearly not allowed.

Per IRS Publication 526:
The contributions must be made to a qualified
organization and not set aside for use by a
specific person.
I think it is allowed, so long as the donor does not propose to deduct the alleged gift. My point is that in addition to being nondeductible, it also seems not to be a bona gift which would take the capital gain out of the income of the donor.
Core Four with nominal bonds and TIPS.

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

Post by Gill » Thu Mar 29, 2018 7:21 pm

Minty wrote:
Thu Mar 29, 2018 12:00 pm
Whether or not the step transaction doctrine applies, I have grave doubts that this arrangement would constitute a bona fide gift. I did a little research; this article is on point. Question whether gift is valid, or a mere sham, as regards income tax of donor, 125 A.L.R. 779 (1940 & current supplement). One of the cases cited leads to this case: "A transfer does not, then constitute a gift for deductible purposes if it is made 'in expectation of the receipt of certain specific direct economic benefits within the power of the recipient to bestow directly or indirectly, which otherwise might not be forthcoming.'” Dowell v. United States, 553 F.2d 1233, 1238 (10th Cir. 1977) (quoting Stubbs v. United States, 428 F.2d 885, 887 (9th Cir. 1970)). Different underlying factual situations, but the principle is the same.

As a logical matter, if this strategy were legal, there would be no need for 529 plans. Appreciated securities could be donated to schools or kids on condition that they be used for tuition.
Aren’t you off the track of this thread? You seem to be talking about charitable gifts which is not the subject here.
Gill

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

Post by Pigeye Brewster » Thu Mar 29, 2018 10:10 pm

Gill wrote:
Thu Mar 29, 2018 7:21 pm
Minty wrote:
Thu Mar 29, 2018 12:00 pm
Whether or not the step transaction doctrine applies, I have grave doubts that this arrangement would constitute a bona fide gift. I did a little research; this article is on point. Question whether gift is valid, or a mere sham, as regards income tax of donor, 125 A.L.R. 779 (1940 & current supplement). One of the cases cited leads to this case: "A transfer does not, then constitute a gift for deductible purposes if it is made 'in expectation of the receipt of certain specific direct economic benefits within the power of the recipient to bestow directly or indirectly, which otherwise might not be forthcoming.'” Dowell v. United States, 553 F.2d 1233, 1238 (10th Cir. 1977) (quoting Stubbs v. United States, 428 F.2d 885, 887 (9th Cir. 1970)). Different underlying factual situations, but the principle is the same.

As a logical matter, if this strategy were legal, there would be no need for 529 plans. Appreciated securities could be donated to schools or kids on condition that they be used for tuition.
Aren’t you off the track of this thread? You seem to be talking about charitable gifts which is not the subject here.
Gill
As long as paying grandchild's tuition is a condition of the gift, it doesn't appear to me that it's a completed gift since OP wouldn't be relinquishing absolute control.

http://law.jrank.org/pages/6577/Estate- ... Gifts.html

Some excerpts (emphasis added):

The Internal Revenue Code defines a gift as a "transfer … in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible." Generally, a gift is any completed transfer of an interest in property to the extent that the donor has not received something of value in return, with the exception of a transfer that results from an ordinary business transaction or the discharge of legal obligations, such as the obligation to support minor children.


To constitute a gift, a transfer must satisfy two basic requirements: It must lack consideration, in whole or in part (that is, the recipient must give up nothing in return); and the donor must relinquish all control over the transferred interest.

The Completeness Requirement A transfer constitutes a gift for tax purposes only if the donor has parted with the ability to exercise "dominion and control" over the property transferred. Many transfers of property satisfy this condition. For example, if A takes B out for a birthday dinner, the act of purchasing the dinner is a gift because A cannot regain control over the food that B consumes, or revoke the acts of purchasing and consuming the meal. When the donor has not relinquished absolutely the ability to control or manage the property or its use, however, the "gift" may not be complete for tax purposes.

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

Post by libralibra » Fri Mar 30, 2018 12:24 pm

Pigeye Brewster wrote:
Thu Mar 29, 2018 10:10 pm
As long as paying grandchild's tuition is a condition of the gift, it doesn't appear to me that it's a completed gift since OP wouldn't be relinquishing absolute control.
It sounds like almost the opposite, since you have more control over a custodial account than over the grandparents. I.e. they could renege on the tuition and just take a 3 week cruise, while shares in a UTMA are completely controlled by the parent.

Based on the citations so far, if people feel it's a sham/illegal/or unethical to gift thru the grandparents to pay the tuition, then they should feel exactly the same about gifting thru the child (but they don't, which is the confusing part to me).

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

Post by FreemanB » Fri Mar 30, 2018 12:52 pm

libralibra wrote:
Fri Mar 30, 2018 12:24 pm
It sounds like almost the opposite, since you have more control over a custodial account than over the grandparents. I.e. they could renege on the tuition and just take a 3 week cruise, while shares in a UTMA are completely controlled by the parent.

Based on the citations so far, if people feel it's a sham/illegal/or unethical to gift thru the grandparents to pay the tuition, then they should feel exactly the same about gifting thru the child (but they don't, which is the confusing part to me).
It is the difference between gifting you money to pay your bills versus "gifting" you money to pay my bills. One transaction is a gift, the other is not.

The key distinction in the OP's case is that he wants to pay private school tuition for a minor child in grades K-12. In other words, he wants to gift appreciated shares to a grandparent to help pay his own bills. From my reading, most people would have no issue with gifting shares to an adult child to pay their own college tuition, since the parent does not receive any direct benefit in that scenario.(They reduce their taxes, but they don't receive any of the funds back for their personal use) The funds don't go towards paying any of their own bills or expenses.(The child could still be a dependent, but that would trigger an entirely different set of tax implications)

In this case, they retain the benefit of the sale(Cash used to pay bills owed by the OP) without paying the taxes due, using the proceeds to pay their own bills. If instead of tuition, they instead asked the grandparent to pay their mortgage so they could afford private school tuition, would you look at the transaction any differently? There's essentially no difference between the two scenarios in this case, as the OP is both the source of the funds and the beneficiary of the sale in both cases. As long as the "gift" is intended solely for paying the OP's own bills, it isn't really a gift and would fail any reasonable test to make that determination.

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

Post by pshonore » Fri Mar 30, 2018 1:12 pm

libralibra wrote:
Fri Mar 30, 2018 12:24 pm
Pigeye Brewster wrote:
Thu Mar 29, 2018 10:10 pm
As long as paying grandchild's tuition is a condition of the gift, it doesn't appear to me that it's a completed gift since OP wouldn't be relinquishing absolute control.
It sounds like almost the opposite, since you have more control over a custodial account than over the grandparents. I.e. they could renege on the tuition and just take a 3 week cruise, while shares in a UTMA are completely controlled by the parent.

Based on the citations so far, if people feel it's a sham/illegal/or unethical to gift thru the grandparents to pay the tuition, then they should feel exactly the same about gifting thru the child (but they don't, which is the confusing part to me).
Simple answer - when you gift through a child, the child is usually subject to the "kiddie tax" unless the gift amount is insignificant. In the original example, it was assumed the grandparent(s) have NO tax liability.

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

Post by CRTR » Wed Oct 10, 2018 12:30 pm

How about the grandparents pay the tuition using their own existing assets and SUBSEQUENTLY receive the the gifts from the parents? The grandparents now have the option to sell the stock now, at a later date, they could perform some TGH or not sell it at all . . . .

You would have a hard time convincing me that this is a step transaction.

Broken Man 1999
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Broken Man 1999 » Wed Oct 10, 2018 12:58 pm

OP, run your plan by the IRS, let us know what the IRS thinks.

Seems pretty easy way to decide the argument, no?

Broken Man 1999
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Jack FFR1846
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by Jack FFR1846 » Wed Oct 10, 2018 1:14 pm

As my dad, who was second generation in the family tax preparation business used to tell me: "It's allowed until you're audited". I had all kinds of sideways schemes I had heard of and would run them by him. When he'd answer like this, I knew to stay away from the scheme.

My favorite was a rep I dealt with. He owned the rep company and was leasing a BMW under the company's name for $6K a month for a year. At the end of the lease, the buyout was $1. His plan was to personally buy the car at the end of the lease. Being an engineer, I brought this to an extreme and asked if I were to arrange to lease the same car for my business for $16k a month and have a buyout at the end of negative $120k (as in, I get a free car and $120k in cash), would that be legal. Note I don't have a business so don't know if there are limits on monthly lease payments.
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celia
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by celia » Wed Oct 10, 2018 1:45 pm

OP, Why don't you try this out by gifting to your parent and have them pay the tuition for their grandchild who is not your child. That will not increase your taxes and it will help lower your capital gains. It also shows an independent decision by your parent.

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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 » Wed Oct 10, 2018 3:24 pm

CRTR wrote:
Wed Oct 10, 2018 12:30 pm
How about the grandparents pay the tuition using their own existing assets and SUBSEQUENTLY receive the the gifts from the parents? The grandparents now have the option to sell the stock now, at a later date, they could perform some TGH or not sell it at all . . . .

You would have a hard time convincing me that this is a step transaction.
I would be inclined to agree.
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Re: Gifting Appreciated Stocks to Grandparent to pay Child's Private School Tuition

Post by MarkNYC » Wed Oct 10, 2018 4:46 pm

Broken Man 1999 wrote:
Wed Oct 10, 2018 12:58 pm
OP, run your plan by the IRS, let us know what the IRS thinks.

Seems pretty easy way to decide the argument, no?
Not quite that easy. The IRS telephone customer service agents are well-trained in procedures for filing, and paying, and responding to notices. They are do not have expertise in technical aspects of tax law, and their answers to technical tax questions are not authoritative.

One could call the IRS Office of Chief Counsel in Washington, and speak to one of the individuals who specializes in the Code section in question, but for most people that is not so easy.

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