Gifting Kids and having same kids gift back.
Father is wanting a higher rate on his CD’s. His thought is to Gift Kids and Grandkids enough money so kids can pay off home mortgage. Kids will than make principle and interest payments back to Father in the form of a gift. Can this all be completed tax free?
Permalink Submitted by Joseph Arsenault on Mon, 2010-08-30 22:26
This probably is not the most appropriate forum for this question but the rule is that each donee may gift up to $1,000,000 dollars during their lifetime before paying gift tax.
Based on your fact pattern, theoretically he could gift the money, file his 709 and … if over his lifetime his cumulative gifts do not exceed the maximum unified credit then he would not be subject to gift tax. The credit essentially equals 1 million worth of gifting at current rates. Then the kids could do the same back. If they gift under the reporting threshold each year back to him, there is no reporting (709) necessary. Otherwise they would have to file the return each year.
Hands down, the father should consult with a tax professional if he is trying to transfer money that could have tax implications and make sure whatever he does is absolutely the most tax efficient way of doing it. There are also considerations for the kids (basis of gift vs. bequest later on), investment property or personal residence? etc.. etc…
Hope that helps your direction somewhat. Make sure to consult with a professional on his unique situation.
Permalink Submitted by Alan Spross on Mon, 2010-08-30 22:53
My take on this is that this is not a gift at all, but a loan. As such, the interest would be taxable. A gift by definition is made without expecting something of equal or greater value in return. There are rules that address the repayment if interest is waived and the amount of waived interest is considered a gift with certain special rules for related parties.
And if these WERE gifts and no repayment was expected, the channeling of funds through several people for the benefit of fewer people to circumvent the 13k annual exclusion would be considered an illegal step transaction. Using the grandkids to funnel their gift to the kids would run afoul of this concept.
But I see nothing wrong with setting this up as an actual loan, but the repayment of interest to the father would be taxable to him and the kids would get no mortgage interest deduction unless the property was secured by a note.
Not really my area of expertise, so I would run this idea by a tax pro before depending on this opinion.
Permalink Submitted by Joseph Arsenault on Wed, 2010-09-01 17:48
I have a slightly different opinion here, especially on the initial gift, but I don’t want to step on Alans toes. He does a great job helping people here.
There are always multiple ways to setup transactions, you want to find the most tax-efficient way to do so.
Definitely get with a tax-planner and find the most tax-efficient way to completely transaction.
Permalink Submitted by Joseph Arsenault on Wed, 2010-09-01 18:37
Just to clarify, my initial opinion was different because I don’t think based on the information you necessarily circumvent the ability to gift the money initially to pay off the house. However:
The more I think about it, Alan is right, it would be much more simple to just have have client loan the kids the money, then have them pay the interest back. It may be more effective for the kids to use the money on something else so they don’t lose the mortgage deduction as Alan mentioned. The rate paid back does not have to be the same rate they are paying on their mortgage either.. You could go in a much simpler direction, and just deal with a small amount of taxation.
Sorry about the multiple replies 🙂