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Author: rraffel Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121261  
Subject: Gift Tax? Date: 10/5/2010 12:07 PM
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Hi All - Hope I can get some help with the following scenario...

Parents want to provide a gift of approx 250k to their child (Child is married with a child of their own). This will be done in the form of a lump sum check. For tax purposes, which of the following makes sense (and is legit)?


1. Structure as a Gift, use the 13k exemption to reduce the overall gift value, but still report on taxes (whose?). Since this is below the lifetime giving limit, there should be no tax liability (?)

Pro: Simple - one time transaction.
Con: Possible tax liability.


2. Structure as a Loan, paying market interest, that is partially forgiven each each in the value of the gift exemption (currently 13k). Loan will be at Market rate, interest payable annually.

Pro: No tax liability (as its a loan). Some interest income for the parents.
Con: Additional paperwork. Must pay interest back to parents annually until loan is fully forgiven.


Would love to hear any advice or comments, especially from people who have gone through a situation like this.

Thx
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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111171 of 121261
Subject: Re: Gift Tax? Date: 10/5/2010 12:27 PM
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rraffel: "Hi All - Hope I can get some help with the following scenario...

Parents want to provide a gift of approx 250k to their child (Child is married with a child of their own). This will be done in the form of a lump sum check."


I will let the tax pros address your primary point, but your question seems to ignore split gifts and that the child is married.

PF - Parent Father
PM - Parent Mother
Son
SW - son's wife
GC - son's child

PF can give 13k to Son and PF can give 13k to SW - total 26k
PM can give 13k to Son and PM can give 13k to SW - total 26k, for a grand total of 52 k in 2010, without gift taxes.

January 1 is less than 3 months away, so the whole exercise can be repeated then, too.

IOW, 104k without gift taxes could be accomplished within three months.

Also, depending upon the intended use of the funds, gifts by PF and PM could also be made to GC, but the Son and SW would not be free to use those funds as they wish.

Regards, JAFO

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111172 of 121261
Subject: Re: Gift Tax? Date: 10/5/2010 12:52 PM
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Adding to JAFO's reply, the remaining $150K would be subject to gift tax. The parent (or parents) would file a Gift Tax return reporting the excess. Assuming that neither parent has exceeded their $1M lifetime gift exclusion, no tax would be due with the return.

As usual, gifts are not income to the recipient so the son and wife have nothing to report.

Ira

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111173 of 121261
Subject: Re: Gift Tax? Date: 10/5/2010 4:43 PM
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Con: Additional paperwork. Must pay interest back to parents annually until loan is fully forgiven.

The son wouldn't have to pay them cash - but the parents would have to consider the interest (even if forgiven as part of a gift) as income - and pay income tax on it.
Here's the table for minimum interest rates:
http://www.irs.gov/app/picklist/list/federalRates.html

I'd look at what the interest rate is for a $200K loan ($52K of the $250K can be gifts between the 2 parents and the son and his wife as pointed out by others)

So avoiding using up the lifetime giving limit would cost the imputed interest * the parents' marginal tax rate. Which probably wouldn't be a very large amount.
Hard to say without more knowledge which would be the right choice - it depends on what they've got for assets / plans for the disposal of those assets after they die (or as gifts in the future). Since they have $250K to give to their son, that would argue that they do have significant assets that it might be worthwhile to keep the gift tax exclusion in tact, even though it'll cost them something like $150K*3%*33% = $1485 (maybe less - really have to look up whether 3% is right on the table, and 33% is just a guess for their marginal tax bracket.)

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 111174 of 121261
Subject: Re: Gift Tax? Date: 10/5/2010 5:01 PM
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(maybe less - really have to look up whether 3% is right on the table, and 33% is just a guess for their marginal tax bracket.)

Now that I've been able to look at the table - it looks like 0.44% is the right rate (make the loan for $200K for 3 years)
So cost to preserve the parent's exclusion would be:
0.44% * 3/12 * $52K * MTR
+ 0.44% * 15/12 * $52K * MTR
+ 0.44% * 27/12 * $52K * MTR
+ 0.44% * 36/12 * $44K * MTR
+ ???? * 3/12 * $44K * MTR (the 44K at the end has to get 3 more months to be after Jan 1.)

MTR = marginal tax rate.
the 3/12, 15/12, etc are because we've got 3 months (out of 12 months in a year) until Jan. 1 2011, 15 months until Jan 1. 2012, etc.

I'm ignoring the interest itself in the above - but since interest rate is low it doesn't affect it much.

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