Brainstorming problems with regular gifts from friend

December 2, 2011 9:03 PM

Off the top of your head, what are the potential pitfalls with a friend giving me a regular gift of money?

I know you are not my tax lawyer, and I will be consulting one, but since they are expensive and (I assume) bill by the hour, I'd like to think this through as much as possible first.

I have lost my job, and am unemployed. I have a chance of another position materialising (from my old employer) early next year. Meanwhile, a good friend and former colleague who draws a salary from my former employer has offered to make me regular gifts of the amount I was earning. Basically, the friend is independently wealthy and does not need their own salary. They also do not like being wealthy and prefer to give away as much money as possible. They live simply and frugally by choice.

The friend made me the offer recently that they would just pass on their post-tax salary payments to me each week, until I found another job. Because I was worried about potential weirdness in the friendship, and because it seemed a strange idea, I said no. This was a few weeks ago.

Today another person in my social circle said they had been approached by an "anonymous donor" who would like to support me until I find work. The deal is basically what the previous friend was offering. So it is pretty clear who the "anonymous donor" is, but somehow I am more comfortable with this situation.

I am thinking of accepting. I am in Australia. Gift tax does not apply on true gifts, but one of the metrics used to determine whether something is really a gift is whether there are regular payments, and another is whether there is an employment relationship. I worry that since the probable ultimate source of the money is a former colleague, and since I will continue to do some unpaid work for my former organisation, this could be construed as an employment relationship, even though the friend has never been my boss in any sense (and works on a different project). This is something I will ask the tax lawyer about.

My question is really whether there are other considerations I should be asking the tax lawyer, or any other lawyer, or if there are maybe better set-ups for this situation than the middleman friend basically handing over an envelope of cash every week.

I would absolutely consider this a loan (even though the friend would not) and would be glad to pay it back or pay it forward if and when I am able.

In case anyone is wondering, the friendship is purely platonic: we are both the same gender, and heterosexual.

posted by anonymous to work & money (8 answers total)

It would certainly give you more peace of mind, wouldn't it, to have this sorted legally? To me it sounds like that hour with the Australian tax lawyer will be worth every penny of the gifted money you'll be able to use to pay for it.
posted by circular at 9:11 PM on December 2, 2011

Let the tax lawyer know you're thinking about paying them back, and make sure there's not some hidden issue with how much a gift can be in aggregate. Also find out how you need to document stuff so that there's no one coming around to ask you why you have buckets of cash on your hands.

You should also double-check that this won't make you ineligible for various benefits - where I'm from, a gift counts towards liquid assets for just about every public assistance program I've heard of.
posted by SMPA at 9:14 PM on December 2, 2011

If your friend won't let you pay the money back, how about striking a deal where this person supports you, and when you are employed in the future, you "pay it forward" to a charity of that person's choice?

That way you wouldn't feel like a freeloader and your friend would know that the money went to a good cause. (Not that YOU aren't a good cause.)

The anonymous donor situation sounds like a relief on the surface, but I think ultimately this is something you and your friend would feel better if you could speak candidly about it to each other. You don't have to tell anyone else what you're doing.
posted by elizeh at 9:54 PM on December 2, 2011 [4 favorites]

Why not just have this person hire you as a "personal assistant" or the equivalent?
posted by The Master and Margarita Mix at 10:46 PM on December 2, 2011 [3 favorites]

You ask about potential pitfalls, so I assume you mean other than tax impact.

I say this is the shortest path to a ruined friendship. I strongly advise against it, as both loans and gifts of money are poison to even stable, long-lasting relationships.

If you must, do something for this money. Do some work for your friend, or produce something of value for them. Paint their house, even.

Anything.
posted by rokusan at 3:32 AM on December 3, 2011 [4 favorites]

This isn't a lawyer consideration, but I would say, try not to depend on that money coming in... think of whatever money you have at the moment (now or after receiving any money from your friend) as all the money you have, rather than looking at payments from your friend as an income stream. I'm just thinking of ways to avoid resentment or relationship problems if your friend changes his/her mind or if the situation changes somehow -- it would be best if you weren't dependent on the money continuing to come in, or receiving any particular amount.
posted by chickenmagazine at 5:52 AM on December 3, 2011 [1 favorite]

I'm not sure I understand the question: do you WANT the money to be seen as a gift by the various powers that be, and are worried that the regular payments will be seen as somehow not a gift? Or do you want the money to NOT look like a gift in the eyes of the taxman?

Regardless, the potential pitfalls are this:

1- Tax-wise, I agree that you'll have to consult a tax professional. You can probably get the right answer by looking at your gov't's tax website for the official forms and publications, but an hour with a tax person might be easier. They will have a better feel for the tax laws and loopholes and be able to advise you about the advantages and disadvantages of setting it up as a pure gift, or as nominal employment. (Like in the US, if it's a gift, I'm pretty sure there you don't have to pay employment taxes, only income tax. But if there is any work for hire involved, then those taxes become payable.)

2- There may be tax implications on your benefactor's side. Perhaps classifying it as a gift gives him some tax advantage, but it's also possible that classifying it as nominal employment gives him even more tax advantage. In that case, I would defer to his preference in the spirit of not looking a gift horse in the mouth.

3- Friendship-wise, it seems like this person just genuinely wants to be helpful. I wouldn't worry too much about him getting weird on you. But what I would do is set up an agreement that says something to the effect of "Friend gives this money freely and can choose to stop at any time, and Recipient has no duty to spend the money in any particular way, nor does Recipient have any responsibilities toward Friend in exchange for the money." Maybe you want to put in something like "payments will end after a period of X months."

4- I agree that doing unpaid work for the organization while receiving money from your friend, who is employed within the organization, could look funny. And possibly cause trouble for the organization in a variety of ways should they be audited in some manner. I would look into a way to classify the unpaid work in some official manner. Can it be a donation? Can you be paid as a consultant for that work? It sounds like the organization is in a budgetary or cash-flow situation. Maybe you can agree to charge them a minimum rate, but also give them generous terms on payment, so that they won't have to pay you until next year?
posted by gjc at 7:55 AM on December 3, 2011

If friend is really rich as you lay out here, taxes maybe don't mean much? If you are getting an envelope stuffed with cash, and he isn't trying to get a tax deduction / benefit from doing that, I would be keeping very very quiet about the whole thing. Why the hell would you want the tax man to know about envelopes stuffed with cash?!
posted by Meatbomb at 9:50 AM on December 3, 2011