Author Topic: Splitting tax-free gifts  (Read 2162 times)

Chranstronaut

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Splitting tax-free gifts
« on: July 01, 2015, 06:06:39 AM »
My grandfather is old and ill and has decided to start "pre-paying" family inheritances while still alive to make use of his tax-free giving limits.  I'm trying to wrap my head around who is responsible for what in this scenario:

My grandpa gives my dad $X a year tax-free.  My dad splits that money into three pieces and gives one piece to me, one to my sibling and keeps one for himself.  Is my piece now a tax-free gift from my dad, or is it still from my grandpa?

Further questions:

I read a summary about gift taxes that states, "there will be income tax consequences for the donee on any interest, dividends or rental income the gifted property generates after the transfer."  I plan to invest my portion of the money in my 2015 Roth IRA and the remainder in my non-retirement in index funds.  What, if anything does my dad (or grandpa) need to do?

Do I need to report anything on my tax forms even if I'm not paying taxes on it?

kpd905

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Re: Splitting tax-free gifts
« Reply #1 on: July 01, 2015, 06:44:07 AM »
If he has less than $5.43 million, it is under the current lifetime exemption and will not be taxed so he doesn't need to worry about this.  Gifting under the annual exclusion amount will just let him avoid filling out a few forms.

If he does have over $5.43 million, then the plan sounds good.  If you invest yours in a Roth IRA you will not pay taxes any any interest or dividends.  They are just stating that if he gives you stock and you keep it in a taxable account, you will then have it in your name and any taxable event will be yours to deal with instead of your grandfathers.

http://www.forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/
« Last Edit: July 01, 2015, 07:07:50 AM by kpd905 »

Cheddar Stacker

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Re: Splitting tax-free gifts
« Reply #2 on: July 01, 2015, 09:05:46 AM »
Annual Gift Exclusion = $14,000 right now, and this increases every few years.

If the amount given to your father exceeds that, you should re-think the strategy a bit. If it's less than that, no one will be required to pay any taxes on these gifts/transfers. After the gifts are made and you hold the asset, you are then responsible for any income it produces.

If Gramps is giving > $14,000 to your dad you still might be ok. Is there a mom/wife in the mix here? If so, gramps can give them each $14,000/year. In addition, he can give each of his grandchildren $14,000/year. If the grandchildren are married he can give their spouses $14,000/year as well.

If gramps is giving > any of the amounts described above, gramps should be filing annual gift tax returns and claiming these gifts. He will likely not have to pay any taxes on the gifts, they will simply reduce his lifetime exclusion (The $5M number). Only when he gives > the lifetime exclusion will anyone have to pay any taxes on the transfer if you do it properly.

MDM

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Re: Splitting tax-free gifts
« Reply #3 on: July 01, 2015, 09:10:47 AM »
My grandpa gives my dad $X a year tax-free.  My dad splits that money into three pieces and gives one piece to me, one to my sibling and keeps one for himself.  Is my piece now a tax-free gift from my dad, or is it still from my grandpa?
From your dad.  And as CS said, X must be <$14K.

Quote
I read a summary about gift taxes that states, "there will be income tax consequences for the donee on any interest, dividends or rental income the gifted property generates after the transfer."  I plan to invest my portion of the money in my 2015 Roth IRA and the remainder in my non-retirement in index funds.  What, if anything does my dad (or grandpa) need to do?
Nothing.

Quote
Do I need to report anything on my tax forms even if I'm not paying taxes on it?
No.

Enjoy!

Chranstronaut

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Re: Splitting tax-free gifts
« Reply #4 on: July 06, 2015, 07:59:53 AM »
Happy cake day Cheddar!

Thanks guys!  Based on the actual amounts involved, I think my dad and mom are each getting something from my grandpa and then each will gift something to us kids (dad gives me $Y <14k, mom gives sibling $Y <14k out of total pot from grandpa $X <$28k).

While it's successfully tax-free, this seems like an inefficient setup from a lifetime gift limit perspective.  My grandfather is giving out $Y anyway; if he did $Y/3 to each of us directly, my dad wouldn't use up any of his lifetime limit.  I'm wondering why they structured it the way they did other than it's unlikely we'd hit the ~$5mil lifetime limit, so who cares?

MDM

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Re: Splitting tax-free gifts
« Reply #5 on: July 06, 2015, 11:32:18 AM »
My grandfather is giving out $Y anyway; if he did $Y/3 to each of us directly, my dad wouldn't use up any of his lifetime limit.

As long as the annual gifts from one person to another are less than $14K each, no lifetime limit is used.  Google   lifetime gift limit   for details.

EricP

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Re: Splitting tax-free gifts
« Reply #6 on: July 07, 2015, 10:10:54 AM »
Happy cake day Cheddar!

Thanks guys!  Based on the actual amounts involved, I think my dad and mom are each getting something from my grandpa and then each will gift something to us kids (dad gives me $Y <14k, mom gives sibling $Y <14k out of total pot from grandpa $X <$28k).

While it's successfully tax-free, this seems like an inefficient setup from a lifetime gift limit perspective.  My grandfather is giving out $Y anyway; if he did $Y/3 to each of us directly, my dad wouldn't use up any of his lifetime limit.  I'm wondering why they structured it the way they did other than it's unlikely we'd hit the ~$5mil lifetime limit, so who cares?

Just from reading what they are doing, I don't think they are doing it this way for tax reasons.  From a purely outsider perspective, it seems Gramps just wants to give the money to his kids and then said "If you want to give it to your kids that's fine, too." but doesn't want to give to the grandkids directly. Maybe I'm reading in to this too heavily.

Lastly, unles $Y/3 is greater than $28k ($56K if you're married) than your dad (and mom) won't be using any of their lifetime limit.

And lastly, this only matters if Gramps has more than $10.46M in total inheritance (I'm assuming he has a deceased wife).  Otherwise all this will pass tax free upon his death anyways.

I am right in saying that he gets his wife's amount as well, correct?