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My father-in-law has thought he wants to turn over ownership of all of his US savings bonds to his 3 sons.  Each son has approximately $100K that would be given to him.

In reading the IRS & Bond info, it clearly states that if FIL does this, it is considered the same as him cashing them, therefore FIL would be the one to pay income tax on the interest (which is considerable) to the total of about $150K for the 3 sons.  OK, so far, but my question is this:  How is the gift tax figured for the sons.  I know that $12K is the max, but what would the total given be if in lump sum, and how is that money taxed when the gift is over $12K? Ordinary income? Interest income?

From what I've seen so far, this is probably NOT a good idea, and we've already told him that, after all, it is his money.  The caveat here is that he is 94, in good health, lives alone, still drives, has most of his mental capabilities etc.  This is just another of his ideas.
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It would be far better to let the sons inherit the Savings Bonds IMHO, unless they need the money now.  I presume that the bonds are not banging against the 30 year limit.  If they are, I would see a tax professional.

brucedoe
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None of us need the money, and don't know where this idea came from, unless he thought he could now pass the tax liability to us now, rather than later.  He's got some HH bonds that pay him interest into his checking, the rest are from the late 80s to current.

We are simply looking for the negatives to pass onto him so he'll stop this foolishness now.
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You might ask this on the tax strageties board to get more info on the tax implications.

I don't know if savings bonds qualify for being inherited at a stepped up tax basis or not. That would be a good place to ask. It could be that if they are left in his estate, that noone will have to pay the taxes.

Greg
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There is no step up in basis on savings bonds.  At the time of his death, either his estate pays the income tax due, or those of us inheriting them pay the tax due when we cash them.

Either way, Uncle Sam gets his fair share (well, maybe not fair, but he still gets his share).
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FYI, gift tax wouldn't really be 'paid'. What is it is that every dollar over the annual exemption reduces your 'unified gift & estate tax credit'.

For instance, if you have a $2 million unified credit, then if you go over $12K in gifts, you have to start reducing that. Meaning $100K to each of you, minus $36K (3*$12) would leave $300K-$36K = $264K exceeding the limit.

*If* anything was to be paid, it would be paid by your dad (the giver), not the recipients. But instead, he'd just have to file a gift tax form and reduce his unified credit by $264K, meaning he has that much less exemption on his estate from estate taxes.

If he is looking at paying estate taxes when he passes, and if he doesn't need the money, then it wouldn't be a bad idea to give each of you gifts up to the annual limit each year, but preferably not from things like savings bonds that would cause interest income in addition.

But going over the limit wouldn't help avoid estate taxes - which is exactly the point of the gift tax.
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Okay, I asked this on the estate board, but since Delta1 is giving advice here, I'll cross post: I was aware of two, and now three, things, but I don't understand how they intersect. 1) Annual gifts of (currently) $12,000. Each person can give this amount to as many people as they want (as far as I know). Is there some limit to a lifetime total on these gifts? IF MIL gives her daughter and son-in-law $24,000 per year for 15 years is she exceeding a limit? 2) Estate tax exemption. Currently $2 million, going up in 2009, eliminated for 2010 (rich people watch your back year) after which is conjecture. As far as I know, the $12,000 per year given while alive is irrelevant to the $2 million exemption once the person dies. 3)Uniform tax credit. Like what? It says $345,000 lifetime exemption, provided you file the gift tax form. Does this $345,000 include those $12,000 per year gifts? Does it have anything to do with the $2 million estate exemption? Or is it something completely different?
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Bobcat

But wait, you aren't talking about exceeding the exclusion for taxes, which I think now is something like $2 million.  As I recall you are talking only about a quarter of that.  Maybe there is a lot more?

brucedoe
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Delta

But Bobcat says he has a slew of CDs on which he gets paid the interest so if he cahed those in to give gifts, there would be no interest charges.

brucedoe
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Sorry about making you cross post :)


1) Annual gifts of (currently) $12,000. Each person can give this amount to as many people as they want (as far as I know). Is there some limit to a lifetime total on these gifts? IF MIL gives her daughter and son-in-law $24,000 per year for 15 years is she exceeding a limit?

No. There is a limit on how much you can exceed those amounts (the annual limit increases with inflation, so eventually it'll be $13K, then $14K, etc). There is no limit to how many times you can give that amount.


2) Estate tax exemption. Currently $2 million, going up in 2009, eliminated for 2010 (rich people watch your back year) after which is conjecture. As far as I know, the $12,000 per year given while alive is irrelevant to the $2 million exemption once the person dies.

The $12K per year is, but any amount you exceed it is not.

The estate tax exemption is actually called the 'unified credit'. Unified in this case is referring to estate tax and gift tax combined.

You can use up your unified credit by giving gifts *over* the annual $12K exclusion. So, if you gave someone $20K, then you'd have to use up $8K of your unified credit (or otherwise the giver would need to pay actual cash taxes on the $8K).


3)Uniform tax credit. Like what? It says $345,000 lifetime exemption, provided you file the gift tax form. Does this $345,000 include those $12,000 per year gifts? Does it have anything to do with the $2 million estate exemption? Or is it something completely different?


No, the $345K does not include those gifts. Its again talking bout the amount *over* those gifts.

And, okay, you got me, its a bit more complicated than that (isn't is always). But you're starting to bump up against what I understand. There are two unified credit amounts ('unified'? ha!) and its higher for estate taxes. The $345K you refer is actually said by the IRS to correspond to $1 million in gifts (I guess there's a 34.5% rate in there somewhere?).

So at this point I'm just gonna refer you to IRS publication 950, and, probably then, back to the tax strategies board if you want to know more:
http://www.irs.gov/publications/p950/index.html

But as it refers to your situation, its probably sufficient to know this:
1) The giver has to file and 'pay' the gift tax if they give more than the annual limit to any one person
2) Giving over that amount doesn't mean the giver actually needs to pay cash, but, if they chose not to, then they need to reduce their lifetime credit which applies to estate taxes as well.
3) If they then have an estate large enough to be taxed, they will pay more estate taxes upon passing becuase they're reduced their credit.
4) All this is entirely to make sure you can't avoid estate taxes by just giving it all away before you die.



Delta

But Bobcat says he has a slew of CDs on which he gets paid the interest so if he cahed those in to give gifts, there would be no interest charges.

brucedoe

Yes, that might be a better alternative source of funds if he chose to give gifts.
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1) Annual gifts of (currently) $12,000. Each person can give this amount to as many people as they want (as far as I know). Is there some limit to a lifetime total on these gifts? IF MIL gives her daughter and son-in-law $24,000 per year for 15 years is she exceeding a limit?

That's corrrect. No limit on how many years you do this.
Some older people use this to transfer wealth for years. In Millionaire Next Door, he mentions "economic outpatients" who become dependent on the extra $24000 from MIL.

2) Estate tax exemption. Currently $2 million, going up in 2009, eliminated for 2010 (rich people watch your back year) after which is conjecture. As far as I know, the $12,000 per year given while alive is irrelevant to the $2 million exemption once the person dies.

That's correct. It might have a different name that "estate tax exemption."

One of the other boards I read regularaly is Estate Planning and the Fool

Vickifool

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One of the other boards I read regularaly is Estate Planning and the Fool Thanks Vicki, Delta. I'm pretty sure I have this straight now. If MIL wants to give more than $12,000 (whether we need/want the money or not), she (or her accountant) needs to file the gift tax form. She does not have to pay the tax, if on the form she uses the lifetime unified exclusion. However, if she leaves close to whatever the estate tax exclusion amount is at the time of her death, the unified exclusion will need to be factored in, meaning estate taxes may be owed. It's basically a way of upfronting the estate while the person is still alive, and is probably helpful if people need the money. In this case, the question is whether MIL feeling good about giving an anniversary present outweighs the hassle. I guess as long as her accountant is told to fill out the form, and since some accountant (not me, that's for sure) will have to do the paperwork after MIL dies, anyway, the real issue is just making sure she knows a form needs to be filled out. We decided we probably will pay slightly lower taxes on the interest (same federal bracket, slightly lower state taxes).
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