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<<My wife's father and my wife equally owned some property which was recently sold. The proceeds, according to my father-in-law, pass "tax-free" to our children ($10,000/child) plus the share my father-in-law owned he passed to my wife (his daughter) tax-free. My wife and I would like to invest the proceeds in a BTD strategy. Is it necessary to make this investment in a UGMA or UTMA to realize the tax break of the proceeds from the sale? If I don't use a UGMA or UTMA have I lost anything?>>

It isn't clear to me what you mean when you say the proceeds pass tax-free to your children. If you are talking about avoiding gain on tax from the sale of the property, it would appear that your father-in-law is mistaken. If he is saying that he or your wife is giving $10,000 to each child, free of gift tax, that would be at least approximately correct. Actually, the amount you can give to each child is $20,000 if you and your wife agree to gift splitting, and it is $30,000 if your father-in-law participates in the gift. (This would be reduced by the amount of any other gifts made by the same people to your children within the same year.)

As to the use of UGMA or UTMA, this is not necessary to qualify for the $10,000 per person gift tax exclusion. However, it's difficult to see how you can manage money on behalf of your children unless you are either a custodian under UGMA/UTMA or a trustee. It's easier and cheaper to set up an account under UGMA/UTMA than to set up a trust, but trusts are much more flexible and provide protections you simply can't get with an UGMA/UTMA account. For more on this, visit my web site at homepage.interaccess.com/~kathomas

KAT in Chicagoland
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