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Hello:

I am in the middle of a discussion on the Bond Board about my mothers retirement planning. One issue that came up is that it might help her considerably if I add money to her savings at her date of retirement. it would allow her savings to last much longer.

My questions are these:

If my wife and I gift her the maximum per year for 5 years, does she pay any taxes on that?

Is a gift the best way to get money to her?

If that money, and the proceeds, are left when she passes away, does it pass to me tax free (assuming an estate small enough to not be subject to taxes)?

Splotto

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Splotto,

The receiver of a gift pays no taxes. If you remain within the annual limit then you do not pay 'gift tax'. Depending on how the funds are transferred you may need to file a gift tax return to report the transfer.

Depending on your state, even if you do not pay estate tax there could be probate fees. You are talking about transferring over $100,000. Depending on her current assets, it could trigger probate. Any remaining debts that she incurred would be paid during probate.

Having the assets in her name could prevent her from accessing 'low income' programs. If she needs long term care, the funds would have to be spent before she would be eligible for Medicare.

Her income tax rate is probably lower but gifting the principle may not be the best way to transfer the money to her. Depending on whether it would cause you any AMT issues, you could buy tax-free bonds in your name and give the income to her.

Debra
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I am in the middle of a discussion on the Bond Board about my mothers retirement planning. One issue that came up is that it might help her considerably if I add money to her savings at her date of retirement. it would allow her savings to last much longer.

My questions are these:

If my wife and I gift her the maximum per year for 5 years, does she pay any taxes on that?


The recipient never pays any tax on gifts, regardless of frequency or amount. It's the donor who faces gift tax responsibility if annual gifts total more than the exempt amount (currently $11,000).

Is a gift the best way to get money to her?

From a strictly money management and tax standpoint, I'd wait until she needs the money then give it to her or, better yet, pay enough of her expenses that she'd qualify as my dependent. This raises a whole lot of personal issues, though, so you need to consider all aspects, not just the tax one.

You also need to think about what would happen should you die before she does. This is part of your estate planning which may need revision as you plan for her future.

If that money, and the proceeds, are left when she passes away, does it pass to me tax free (assuming an estate small enough to not be subject to taxes)?

After you give it to her it's her money, and if there's any left when she's gone it's distributed according to her will. Heirs, like gift recipients, recognize no taxable income unless the distribution would have been taxable income to the decedent, e.g., traditional IRA distributions.

Phil
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Deb & phil:

Thanks. What it comes down to is this: In order for her to have enough money to live out her retirement, I will probably have to add to her savings. If she and I can realize a tax savings by doing so, it would be preferable. I doubt anything I give her will take us over the federal inheritance tax threshold. I am thinking more like $10k a year for 5 years, from my wife and I.

Splotto
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"If my wife and I gift her the maximum per year for 5 years, does she pay any taxes on that?"

A recipient never pays tax on a gift, the grantor (giver) is responsible for the tax. The best way to avoid gift tax is to simply not to give more in any one year than the annual gift exclusion, presently at $11,000. This exclusion amount goes up from time to time, it will next go to $12,000, but we don't know in what year that will be. I mention the increase because you mentioned giving over a five year period and there is a pretty good chance that it will be raised to $12,000 some time in the next five years. So you and your wife can presently give your mother $22,000 a year. You can do this one of two ways to get both you and your wife's annual gift exclusion. First, is to write two checks, one signed by you and the other from your wife, each for $11,000 or less. I normally utilize separate accounts (one joint) to do this, but I actually think it could be from the same account as long as the checks were signed each giving spouse. The second way to use the two gift exclusions is to write just one check and then file a gift tax return where your wife can elect half the gift. I prefer the first method of using two checks as to me it is much simpler.

"Is a gift the best way to get money to her?"

Probably yes. As long as you don't want or need to give her more than $22,000 a year then it should work fine. If $22,000 a year is not enough, then some other options might include giving more and using up some of your universal exclusion (sorry I can't think of the correct term for this right now); buying her house; or hiring her to say take care of the grandkids. The $22,000 annual gifts are probably the simplest and best way to go in most cases.

"If that money, and the proceeds, are left when she passes away, does it pass to me tax free (assuming an estate small enough to not be subject to taxes)?"

Assuming she leaves it to you! It would have to be either spelled out by the will or in a financial account that would go to you outside of the will such as a transfer on death designation. If you gift her stock you will not get a step up in basis upon inheriting the stock from her if you gifted it within a certain time period - one year I think.
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VM:

Thanks.

Splotto
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As someone involved in the discussion of Splotto's mom on the bond board, let me try to ask the question for which I thought we needed advice from the tax gurus (though a lot of points we didn't think of about framing wills and avoiding probate have been useful).

Mother Splotto will be in the lowest tax bracket (if she pays any income taxes at all), and the earnings on an extra $100,000 invested from her son's gifts isn't going to throw her into a higher bracket (unless she becomes a successful day-trader, of course). Splotto is in a much higher tax bracket, and any additional money he saves in taxable accounts (or even tax-exempt bonds) is subject to AMT.

So, from a tax standpoint, it would seem to make sense just to gift her the money up-front, which we've calculated, together with her tax-free pension and social security, will put her in a secure position. She would then leave Splotto what's left of this money in her will. If she dies young, he would end up (I think) with more after-taxes than if he put the money into the same investment for himself. If she dies old, he's helped out his mom, which he would end up doing later, from the money he would now be investing and being taxed on, anyway (being the dutiful, caring, son, he is).

So, my question is legality. We're talking about gifting money to someone who pays lower taxes, then (potentially) getting the money back as inheritance. The intent is not to avoid taxes—the intent is to provide Mom with security—but the result would seem to be something of a tax-shelter, albeit a minor league one.
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As someone involved in the discussion of Splotto's mom on the bond board, let me try to ask the question for which I thought we needed advice from the tax gurus (though a lot of points we didn't think of about framing wills and avoiding probate have been useful).

Mother Splotto will be in the lowest tax bracket (if she pays any income taxes at all), and the earnings on an extra $100,000 invested from her son's gifts isn't going to throw her into a higher bracket (unless she becomes a successful day-trader, of course). Splotto is in a much higher tax bracket, and any additional money he saves in taxable accounts (or even tax-exempt bonds) is subject to AMT.

So, from a tax standpoint, it would seem to make sense just to gift her the money up-front, which we've calculated, together with her tax-free pension and social security, will put her in a secure position. She would then leave Splotto what's left of this money in her will. If she dies young, he would end up (I think) with more after-taxes than if he put the money into the same investment for himself. If she dies old, he's helped out his mom, which he would end up doing later, from the money he would now be investing and being taxed on, anyway (being the dutiful, caring, son, he is).

So, my question is legality. We're talking about gifting money to someone who pays lower taxes, then (potentially) getting the money back as inheritance. The intent is not to avoid taxes—the intent is to provide Mom with security—but the result would seem to be something of a tax-shelter, albeit a minor league one.


Yeah, what he said. :-)

Splotto
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So, my question is legality. We're talking about gifting money to someone who pays lower taxes, then (potentially) getting the money back as inheritance. The intent is not to avoid taxes—the intent is to provide Mom with security—but the result would seem to be something of a tax-shelter, albeit a minor league one.

There is nothing illegal about this.

However, it is not risk-free. The main risks are that (1) the $100,000 will be consumed voluntarily or involuntarily by the mother. As stated earlier in the thread, if she needs certain "low-income" services in the future, she will have to spend down her assets. Giving them back to splotto won't count. (2) the mother will choose to leave the $100,000 to someone else or charity or there is a large, but unknown creditor waiting. (3) Giving the $100K in one lump triggers gift tax return filing. While there may be no tax due now, it will impact splotto's ability to give large gifts in the future.

Professional advice from someone experienced with geriatric finances would be a wise investment.

Ira

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However, it is not risk-free. The main risks are that (1) the $100,000 will be consumed voluntarily or involuntarily by the mother. As stated earlier in the thread, if she needs certain "low-income" services in the future, she will have to spend down her assets. Giving them back to splotto won't count. (2) the mother will choose to leave the $100,000 to someone else or charity or there is a large, but unknown creditor waiting. (3) Giving the $100K in one lump triggers gift tax return filing. While there may be no tax due now, it will impact splotto's ability to give large gifts in the future.

Thanks. They are not really risks for me. I will truly be giving her the money. I just want her to have it if she needs it. If I happen to get some back, then great. If not or if she gives it to someone else, that's her choice. I am really more interested in handling the whole transaction as tax-friendly as possible.

The whole issue arose from her savings going into retirement possibly not being sufficient to last her for more then 25 years. I am just trying to help out on the back end of her life the same way she helped me out on the front-end of mine by raising me.

Splotto
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I'm sure all the warnings are appreciated, but I think after considerable discussion of the situation, Splotto has come up with calculations of how much more savings his mother will need to keep her out of the poor house, permanently, using very conservative assumptions and accounting for long-term care insurance and health care costs. And, sometimes parents and children actually can trust each other, even if there is no guarantee she won't decide to run off with the aging drummer for a has-been rock and roll band or blow her gifted savings in the casino.
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I'm sure all the warnings are appreciated, but I think after considerable discussion of the situation, Splotto has come up with calculations of how much more savings his mother will need to keep her out of the poor house, permanently, using very conservative assumptions and accounting for long-term care insurance and health care costs. And, sometimes parents and children actually can trust each other, even if there is no guarantee she won't decide to run off with the aging drummer for a has-been rock and roll band or blow her gifted savings in the casino.

...Or lose them through a lawsuit.

Seriously, the responses are not intended only for splotto, who may have the second most wonderful, considerate mother in the world (after my own), but for everyone else who reads these boards and thinks..."why don't I do that, too." I'm not trying to convince him not to do this, or to do it differently. I'm (and I assume others) are trying to lay out all of the posible pitfalls. It's then up to splotto (as he's already indicated he has) to review them and say... "Nah, this one's not an issue. Nor is this one. Whoa, I didn't think about that!, etc." At the end, he totals up his concerns and makes a decision. I'm sure that whatever decision he makes, it will be the right one for him.

Ira
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I'm sure all the warnings are appreciated, but I think after considerable discussion of the situation, Splotto has come up with calculations of how much more savings his mother will need to keep her out of the poor house, permanently, using very conservative assumptions and accounting for long-term care insurance and health care costs. And, sometimes parents and children actually can trust each other, even if there is no guarantee she won't decide to run off with the aging drummer for a has-been rock and roll band or blow her gifted savings in the casino.

Splotto is attempting to do the best for his mother. The question was specifically about income and inheritance taxes. Limited information is given about her overall finances and detailed information does not need to be given. Splotto and his mother are the ones who need to do the analysis and make the final decision but given the nature of the question there are other issues that at least should be presented for their consideration and the risks should be stated.

There is some tax advantage to transferring the income to the family member in the low tax bracket. Given the question she is does not have a high net worth. Transferring of assets into her name which is legal and would probably reduce income taxes might make her ineligible for low income programs that exceed the value of the reduced taxes. Low income programs vary from the small, such as reduced phone rates, to major, such as rental assistance.

Debra
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