Author Topic: Investing in parentsí name to reduce taxes- crazy?  (Read 1574 times)

ThriftyTechie

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Investing in parentsí name to reduce taxes- crazy?
« on: January 20, 2018, 09:12:06 AM »
My SO and I have done quite well financially and have a lot of taxable investments, not enough 401k room. Weíre in a very high tax state, so marginal tax rate on qualified dividends is ~35%, interest income is close to 50%.
Our parents are both basically poor immigrants. My parents are at 0% but in Canada (15%+ withholding on dividends from US ETFs). My SOís parents are 0% on dividends, 12% on income, but  6% state tax.
We both have very good relationships with our parents. How crazy would it be to gift significant $ to them and essentially invest in their name for lower taxes, and get it back on inheritance? In the US, there is an additional perk of step-up cost basis on inheritance!

MDM

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #1 on: January 20, 2018, 11:25:07 AM »
How crazy would it be to gift significant $ to them....
Depends on what they do with the money and with their wills.

Nate79

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #2 on: January 20, 2018, 06:20:16 PM »
This is tax fraud.

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MDM

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #3 on: January 20, 2018, 06:33:58 PM »

Villanelle

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #4 on: January 20, 2018, 06:39:07 PM »
I am not a lawyer or an accountant, but you aren't actually giving them this money.  It isn't there's to do with as they see fit.  Therefore, it is basically your account, in their name in order to avoid taxes.  I'm not sure how that wouldn't be tax fraud. 

MDM

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #5 on: January 20, 2018, 06:42:44 PM »
... you aren't actually giving them this money.  It isn't there's to do with as they see fit.
That isn't what the OP said.  I agree that, if this is the case, it would not be legal.  But people are allowed to gift money to other people.

Nate79

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #6 on: January 20, 2018, 06:43:12 PM »
Yes, classic tax fraud. Gifting with expectation of getting something back all to avoid taxes.

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MDM

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #7 on: January 20, 2018, 06:55:05 PM »
Yes, classic tax fraud. Gifting with expectation of getting something back all to avoid taxes.
I don't think "expectation of getting something back" includes inheritance.  But if you can cite something in 26 U.S. Code Chapter 12 - GIFT TAX | US Law | LII / Legal Information Institute or other part of the tax code...?

ThriftyTechie

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #8 on: January 20, 2018, 07:08:29 PM »
Yes, classic tax fraud. Gifting with expectation of getting something back all to avoid taxes.

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Iím pretty sure many strategies wealthy families use to avoid taxes sound like tax fraud, but are actually perfectly legal. Weíre just not wealthy enough to have that kind of creative accountants.

seattlecyclone

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #9 on: January 20, 2018, 07:42:41 PM »
I see nothing wrong with a bona fide gift, where your parents would be absolutely free to spend this money with no restrictions, written or otherwise. If they happen to not use the money and end up transferring it back to you in their will, so be it. Nothing wrong with that.

Where it becomes questionable is if it's a "gift" in name only, where the account is primarily under your control and your parents feel obligated not to spend the money because it's not really theirs.

Villanelle

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #10 on: January 20, 2018, 09:10:57 PM »
... you aren't actually giving them this money.  It isn't there's to do with as they see fit.
That isn't what the OP said.  I agree that, if this is the case, it would not be legal.  But people are allowed to gift money to other people.

Yes, but if there is a clear expectation of what they will do with the money and they in effect aren't allowed to control or use it, then it isn't actually a gift.  he'd be "giving" it to them with an expectation that they don't touch it (so it is saved for him) and presumably with him actually controlling where it is invested.  That is not a gift.  It's "here, hold this for me for a moment". 

MDM

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #11 on: January 20, 2018, 09:25:40 PM »
... you aren't actually giving them this money.  It isn't there's to do with as they see fit.
That isn't what the OP said.  I agree that, if this is the case, it would not be legal.  But people are allowed to gift money to other people.

Yes, but if there is a clear expectation of what they will do with the money and they in effect aren't allowed to control or use it, then it isn't actually a gift.  he'd be "giving" it to them with an expectation that they don't touch it (so it is saved for him) and presumably with him actually controlling where it is invested.  That is not a gift.  It's "here, hold this for me for a moment".
And if the parents decide "hey, the four of us should get together for a 'round the world cruise using this money our kids gave us" then what happens?

Paul der Krake

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #12 on: January 20, 2018, 10:42:07 PM »
Legality aside, that sounds like a recipe for disaster. You're giving money to people who have never had any. How will you navigate means-tested programs, general liability questions, and the onset of dementia?

Sibley

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #13 on: January 21, 2018, 07:59:15 PM »
Legally, this sounds iffy. Before you actually do it, I'd find an accountant/lawyer who is familiar with all the tax loopholes the super rich use. Practically, I agree with Paul. There's so much that could go wrong.

You might also look into tax advantaged muni bonds. Or you know, just pay your taxes in recognition of the fact that you're part of society  and have received a lot of benefits from that society, whether directly or indirectly.

swampwiz

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #14 on: January 29, 2018, 10:38:07 PM »
As long as the cash gifted to them and properly documented on the gift tax form, I don't see a problem with this.  Of course, for you to get the money back (i.e., not as inheritance), they'd need to gift it back to you.  You didn't mention other folks in their wills (e.g., your siblings), but if wills are being constantly redrawn in concert with your gifts, then it is in the same legal territory as the world's oldest profession: when does being a "sugar daddy" turn into being a "john"?  Now, if you're the only inheritees, then there would not need to be such redrawing, and you would get your money back through inheritance.

Something to think about is that they having cash could cause issues with means-tested benefits and lawsuit exposure.  I'm a cheapskate that loves to dodge taxes, but I wouldn't do it.

GOFU

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #15 on: January 30, 2018, 04:25:43 AM »
You need to start the analysis on how to get the hell out of that high tax jurisdiction. Please tell us what state this is so I can scratch it off my list of places I would ever move to.

babybug

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #16 on: February 09, 2018, 11:28:56 PM »
Just like planned giving - there are entire industries dedicated to this very idea: give a gift with the expectation of future benefits, to maximize tax efficiency. Perfectly legit.

But I would think twice about mixing family and money in this fashion.

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testtest

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #17 on: February 12, 2018, 09:14:12 PM »
I think you should pay your taxes.

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swampwiz

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Re: Investing in parentsí name to reduce taxes- crazy?
« Reply #18 on: February 21, 2018, 02:23:35 AM »
You need to start the analysis on how to get the hell out of that high tax jurisdiction. Please tell us what state this is so I can scratch it off my list of places I would ever move to.
The problem is that states with high tax rates tend to be the states where it is much more possible to earn such income in the first place.