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My sister-in-law (SIL)currently lives and works overseas. She has for several years, and intends to stay there for several more years. She also currently has a US bank account, with a balance of $40,000+. She wants to transfer the money to myself and my wife (her sister) in order to protect it from a potentially draining litigation she is named in, while at the same time avoiding any serious (or even not-so-serious) tax penalties.

Is this even legal? Is a gift the proper way to do this? I have envisioned a few scenarios, and am unsure of the applicability of any of them:

1) SIL gifts each of us the money, in $10G increments ($10G in 2000, $10 in 2001). Is there some deadline in Jan/Feb 2001 for a gift to be considered as being given in 2000?

2) SIL gifts one of us the money. I'm sure there are tax implications in this scenario, but I don't know what they are or where to find them. I have tried searching the message board for this topic, but wasn't able to find anything relevant. What is the reporting mechanism for such a gift, and what are the implications of not reporting it?

3) Some other arrangement where the money can no longer be legally associated with her.

I do know that she does not want to transfer the funds to her overseas account.
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My sister-in-law (SIL)currently lives and works overseas. She has for several years, and intends to stay there for several more years. She also currently has a US bank account, with a balance of $40,000+. She wants to transfer the money to myself and my wife (her sister) in order to protect it from a potentially draining litigation she is named in, while at the same time avoiding any serious (or even not-so-serious) tax penalties.

Is this even legal? Is a gift the proper way to do this? I have envisioned a few scenarios, and am unsure of the applicability of any of them:

1) SIL gifts each of us the money, in $10G increments ($10G in 2000, $10 in 2001). Is there some deadline in Jan/Feb 2001 for a gift to be considered as being given in 2000?


No. Gift tax operates on a calendar year basis. Any gift your s-i-l makes now are 2001 gifts.

2) SIL gifts one of us the money. I'm sure there are tax implications in this scenario, but I don't know what they are or where to find them. I have tried searching the message board for this topic, but wasn't able to find anything relevant. What is the reporting mechanism for such a gift, and what are the implications of not reporting it?

I'm assuming here that your s-i-l is a U.S. citizen. She can give you and your spouse $10,000 each free of gift tax. If she gave you $40,000 in 2001, that would result in $20,000 of taxable gifts. Assuming she's never made any taxable gifts before, that would use some of her unified credit, and she wouldn't actually have to pay anything. She'd file Form 709 to report the gifts, compute the tax, and apply the credit. Failure to do so would mean failure to file a required return. If done willfully, that's a crime.

A bigger issue is whether parking her money in a nominee's name will help her. In every U.S. state I'm familiar with, creditors could still reach the money. I think she needs a lawyer.

TMF ExRO
Phil Marti
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Phil answered the tax questions. So, here's a quick take on the legal issue.

These gifts will do nothing -- zippo, zero, nada -- to protect these assets. In any jurisdiction in the US they would be voidable fraudulent transfers. In other words, creditors could reach the assets with little trouble. This is a civil issue not a criminal issue, generally (except in California where fradulent transfers can cause criminal liability, but are rarely prosecuted), with the result usually just being that the person with the assets has to cough them up, though there could be greater civil liability for civil conspiracy to defraud a creditor. However, if bankruptcy comes into play, all bets are off and your participation in this kind of a deal could implicate you in a big mess, including criminal bankruptcy fraud.
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